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PRINCIPLES 



SOCIAL ECONOMICS 



INDUCTIVELY CONSIDERED AND 
PRACTICALLY APPLIED 



CRITICISMS ON CURRENT THEORIES 



5^ 



GEORGE GUNTON 



^-■l\ ''"' AUTHOR OF "wealth AND PROGRESS 



G0 6j W/ 



a 



G. P. PUTNAM'S SONS 

NEW YORK LONDON 

VJ WEST TWBNTY-THIRD ST. z; KING WILLIAM ST., STRAND 



1891 



/ ^ 



COPYRIGHT, 1891 
BY 

GEORGE GUNTON 



Ube TknicfjcrbocF;er ipress, IRew Jljorft 

Elecliutyped and Printed by 
G. P, Putnam's Sons 



TO MY WIFE 

WITHOUT WHOSE INSPIRATION AND AID THIS BOOK 
COULD NOT HAVE BEEN WRITTEN. 



PREFACE. 

If there is one subject that should be more attractive to 
the student and more inspiring to the citizen than an- 
other, it is that of social economics, because it deals 
directly and exclusively with the influences and conditions 
which control all human welfare. It is through a knowl- 
edge of the principles and laws of human economics that 
we are enabled to make nature contribute to man's comfort 
and luxury by substituting abundance for poverty, freedom 
for slavery, peace for war, intelligence and morality for 
ignorance and brutality ; in short, a civilization of democracy 
and culture for one of despotism and degradation. When- 
ever the science which should furnish the key to nature's 
bounties and the light to human progress becomes unattrac- 
tive to the student and repulsive to the average citizen, we 
may be assured that there is something fundamentally amiss 
with the conception and treatment of the subject. 

This is precisely the case with political economy to-day. 
Instead of being the beacon-light of industrial and social 
affairs, — the source to which all may turn for safe instruction 
and hopeful guidance, — it is the " dismal science " which 
students avoid, statesmen and capitalists disregard, citizens 
ignore, and laborers discredit. Why is a science so dreary 
and pessimistic, which by its very nature should be fasci- 
nating and hopeful ? The obvious answer is, that it fails 
to fulfill its function as a science of industrial welfare and 
social advancement. On nearly all fundamental questions 
affecting the production and distribution of wealth its doc- 
trines are both uncertain and inconsistent. The popular 



VI PREFACE, 

theory of wages has been exploded by experience, and the 
current doctrines of value, interest, and profit have for gen- 
erations been subjects of perplexing controversy between 
experts and sources of utter bewilderment to students. 

This is mainly due to the fact that the accepted theories 
belong to the hand-labor conditions of the seventeenth and 
eighteenth centuries, which have very little relation to the 
factory conditions of the nineteenth century. Nor should 
this be a matter of surprise, since it is entirely consistent 
with the law of industrial evolution. In its development 
society has assumed several distinct and essentially different 
industrial phases, which have each changed the economic 
structure of society, shifting the centre of industrial move- 
ment and the point of view of economic study. 

Under feudalism, for instance, the land-owning class was 
the centre of all social and industrial movement. Economic 
policy therefore was considered from the standpoint of a 
land-owning class. 

With the development of manufacture and trade however, 
came a radical change in economic relations. Serfs became 
wage receivers, and the cultivation of the land passed to 
tenant farmers, which change transferred the distribution of 
wealth from the domain of authority, to that of economic law. 
By this transition the social basis of industrial prosperity 
was broadened, and the centre of economic movement was 
shifted from the industries required to supply the needs 
of a small land-owning class to those required to supply 
the demands of a relatively large commercial class, whose 
interests were more varied and extensive. In proportion as 
new conditions developed, the narrow paternal policy which 
was adapted to the old regime became inimical to the welfare 
of the community, and a reconstruction of economic doctrine 
from a new point of view became necessary. The efforts of 
two centuries to supply this need culminated in the " Wealth 
of Nations," which really marks the advent of middle-class 
political economy, whose influence has practically moulded 
the economic thought of the present century. 



PREFACE. VI 1 

For the same reason that under feudalism every thing was 
viewed from the standpoint of the land-owner, every thing 
was now considered from the standpoint of the manufac- 
turer and merchant, whose income was derived from trade. 

How to promote sales became the fundamental idea of 
what has been well named the '' Commodities School " of 
political economy. To sell extensively necessitated pro- 
ducing cheaply. And since wages formed the greater part 
of the cost of production, it appeared from the '' com- 
modities " point of view to be as necessary to obtain cheap 
labor as cheap raw material, and for the same reason. 
Consequently it became a cardinal doctrine of the 'Com- 
modities School " that large profits depend upon low 
wages. " It has been my endeavor to show throughout this 
work," says Ricardo, " that the ratio of profits can never 
be increased but by a fall in wages." In the days of hand 
labor and small factories, when the consumption of the upper 
and middle classes furnished a sufficient market for pro- 
ducts, this cheap-labor policy was successful in giving profits. 

But this very success led to the development of large 
factories, which were destined again to revolutionize the 
economic structure of society. For since these large enter- 
prises required a more extensive market for their success 
than any possible increase in the consumption of wealth by 
the upper and middle classes could furnish, the habitual 
demands of the masses for the first time necessarily became 
the foundation of industrial prosperity. Therefore it is in 
the needs of the masses that the economics of the future must 
be stiidied and statesmanship determined. 

To such a change of industrial relations Adam Smith and 
his followers were altogether oblivious ; their conception of 
industrial evolution was too limited to enable them to antici- 
pate it, and their purely '' commodities " point of view pre- 
vented them from observing it. They saw the importance 
of the factory as a means of making wealth cheap, but they 
did not see the economic importance of making man dear. 
Having failed to recognize the laborer as the great factor in 



Vllt PREFACE. 

a market whose consuming power must be increased, they 
continued to treat him only as a productive force in the 
factory, whose cost should be reduced, on the theory as Mill 
puts it, that " profits depend upon wages, rising as wages 
fall and falling as wages rise." 

Thus through an effort to apply erroneous ante-factory 
theories to factory conditions political economy has for 
three quarters of a century been made a gospel of cheap 
labor and an enemy of social advance. 

The growing incompetency of political economy to 'deal 
with modern conditions has begun to be recognized by in- 
ductive economists, and during the last twenty years an 
increasing departure from economic orthodoxy has been 
manifest among the younger economists of Europe and this 
country, which is now developing to the proportions of a 
new school. 

In breaking from the hard and narrow lines established by 
the doctrines of early English economists, the '' New School " 
has already rendered an important service to economic sci- 
ence, by making respectable the re-discussion of the funda- 
mental principles governing industrial relations and political 
policy, in the light of rriodern knowledge. 
- Thus far, however, its work has been critical rather than 
constructive. It has contributed far more to break up the 
old than to establish a new body of economic doctrine. 
Although the English theory of wages has been repudiated 
and the doctrine of laissez faire rejected by them, no ap- 
proximately adequate explanation of wage phenomena has 
been furnished, nor any affirmative principle of public policy 
suggested. 

In the following pages I have endeavored to discuss the 
principles of social economics from the nineteenth century 
point of view. If the facts of modern experience are to be 
the court of final appeal, the great fundamental fact to be 
recognized in our society is the democratic basis of industry^ 

The factory system has made the use of natural forces 
(steam, electricity, etc.) necessary to successful industrial en- 



PREFACE. IX 

terprise. Nature is intensely democratic. She will only 
work cheaply when she is serving a large number. Kings and 
aristocracies may command the unpaid service of slaves, but 
natural forces will work efficiently only for the million. 
Millionaires could not travel by steam or communicate 
by electricity if millions of workmen did not use the same 
methods. In short, the success of all machine-using industries 
now primarily depends on the extent to which their products 
are consumed by the masses. Therefore the prosperity of the 
community in general and capitalists in particular depends 
upon increasing the wants and elevating the social life and 
character of the laboring classes. Considered from this 
standpoint, the whole subject of economics assumes a new 
and altogether more rational and humane aspect. It ceases 
to be a mere '' science of wealth," subordinating producers 
to the product, and becomes a science of human welfare, 
making the social life of the producers the end to which 
the creation of commodities is the great means. In other 
words, it is transformed from a dismal science of pessimism 
and despair, which complacently sees the masses crowded 
to the verge of starvation, into a science of optimism and 
hope, which bears a message of prosperity and progress to 
the whole of humanity. 

Besides giving economic science a humane, hopeful aspect 
hitherto conspicuously wanting, this change in the point 
of view makes it integral, harmonious, and intelligible. 
Much that has been involved in confusion becomes simple and 
clear; much that has been mistakenly regarded as unjust and 
oppressive enough to warrant revolution, becomes obviously 
beneficent and progressive ; and much that has been dole- 
fully taught as axiomatic truth is seen to be manifest error. 

Moreover, when we change our point of view from com- 
modities to men, and make the laborer the initial point of 
observation, the questions of production and distribution 
become susceptible of discussion in terms intelligible to ordi- 
nary minds. We then find value or price assuming a human 
basis, and commodities are seen to be dear or cheap not as 



X PREFA CE. 

they will exchange for more or less gold, but as they will 
exchange for more or less of labor, as economic equivalents- 
With this idea of value the theory of supply and demand of 
which Malthusianism and the wage-fund fallacy are a natural 
outcome, is incompatible. The ratio in which a given quan- 
tity of cloth or shoes is the economic equivalent of a day's 
labor can no more be determined by the mere fact of the 
quantity of cloth or the number of laborers, than can the 
moral quality of a robbery by the number of thieves. The 
only basis upon which two things can be economic equivalents 
of each other is the substantial equality of their cost of 
production. Upon no other principle can exchanges be 
economic, equitable, and mutually advantageous. 

The principle of cost, governed as it is by the cost of the 
dearest portion of the economic supply of any commodity, 
furnishes a keystone to the arch of economic science. 
It supplies the basis for a consistent body of economic 
doctrine capable of explaining the phenomena of wages, 
rent, interest, and profit upon one general principle of 
universal application — namely, the law of economic price 
and its corollary, the law of economic surplus. Instead of 
a system of ''commodity'' economics which justifies human 
degradation as a means of cheapening wealth, we have a sys- 
tem of social economics, which shows that the most effective 
means of promoting the industrial welfare of society on a 
strictly equitable basis, must be sought in influences which 
develop the wants, and elevate the social life and character 
of the masses. Here then we have a sound, economic, and 
broad social basis for intelligent, humane, and progressive 
statesmanship, which shall promote individuality without 
incurring the follies of laissez faire, and utilize the educa- 
tional and protective functions of the state without incurring 
the dangers of paternalism. 

New York City, January, 1891. 



CONTENTS. 



PART I. 

The Principles of Social Progress. 

CHAPTER I. 

SOCIAL PROGRESS. 

PAGE 

The law of progress the key to history 3 

The nature of progress 4 

Progress defined and phenomena classified ...... 5 

Its tendency shown by the primitive condition of man . ■ . . . 6 
By the development of the family as a social unit ..... 7 

By the rise of the feudal system ........ 8 

By the growth of free towns and individual rights . . . . 9 

By the development of the middle class and the factory system . . lo 

Industrial progress different from social and political . . . . n 

The source of individual freedom . . . . . . • .12 

Socializing effect of the wages system . . . . . • -13 

Economic interdependence and social individuality a criterion of civilization, 14 

CHAPTER II. 

THE LAW OF SOCIAL PROGRESS. 



The elements in social progress 
Natural order of social progress 
Industrial progress the basis of all progress 
Comte's mistake ..... 
The intellect the servant x>i human wants 
Relation of egoism to altruism 
Law of social progress summarized . 

xi 



15 

16 

17 

18 

19 
20 
21 



xu 



CONTENTS. 



CHAPTER III 



THE CAUSE OF SOCIAL PROGRESS. 

Human wants the cause of social evolution 
Effectual and non-effectual desires . 
The social source of equity ..... 
Intelligence, justice, and virtue have same origin 
As human vv^ants increase civilization advances 



PAGE 
22 

23 
24 

25 
26 



CHAPTER IV. 



VERIFICATION OF THE LAW OF SOCIAL PROGRESS. 

Progress accompanies large consumption of wealth by the masses 
Small consumption in Oriental countries . 
Under ancient Greece and Rome, few rich, many poor 
Slavery preponderates ...... 

Why ancient philosophy long remained without effect 
Arrested progress cause of Rome's fall 



27 
28 
29 
30 
31 
32 



CHAPTER V. 



THE RISE AND SOCIAL POWER OF FREE CITIES AS VERIFYING THE LAW OF 
SOCIAL PROGRESS. 



Barbarism supplanted by feudalism . . . . ' , 

Concentration of the serfs in the towns . . . , 

The burgesses secure control of the towns by paying rent 
Insurrection of the towns ...... 

Transformation of towns into free cities . . . , 

The cities were the homes of freedom . . . , 



33 
54 
35 
36 
37 
38 



CHAPTER VI. 



THE FALL OF THE FREE CITIES AND ITS EFFECT UPON SOCIAL PROGRESS. 



Progress arrested by their fall .... 

Spain distracted by religious wars 

Premature development in Italy 

German freedom destroyed by imperial alliance 

French cities overcome by the barons 

In England the cities not suppressed 

Charters rendered inviolable .... 

Labor rents superseded by wages 

Feudalism abolished by expansion of freedom in the towns 

Increased wealth of the middle class .... 



39 
40 

41 
42 

4^ 
44 
45 
46 

47 
48 



CONTENTS. xilJ 

CHAPTER VII. 

THE LAW OF SOCIAL PROGRESS AS VERIFIED IN THE PROGRESS OF POLITICAL 
AND RELIGIOUS FREEDOiM, 



Political power of English Commons ..... 
Religious and political liberty follow material development 
Wicliff's Bible succeeds ; Hussite War a failure 
Character of the Jacquerie and the Peasant War 
Social character of the Reformation ..... 

Protestantism due to the social power of middle class 
Condition of the masses from the fifteenth to the eighteenth century 
The factory system. Industrial legislation .... 
Right to vote extended to the laboring classes .... 
Superior industrial conditions of America .... 

Difference between French and American Revolutions 
Industrial prosperity cause of our free institutions . 



PAGE 

49 
50 
51 
52 
53 
54 

h 

57 

58 

59 
60 



PART II. 

The Principles of Economic Production. 

CHAPTER I. 

WEALTH AND THE LAW OF ITS PRODUCTION. 

Mill's conflicting definitions of wealth ....... 63 

Walker's definition ........... 64 

Perry substitutes the word property , . . . . . . .65 

Essential characteristics of wealth ........ 66 

Wealth defined . " . . . ....... 67 

Various views of production ......... 68 

Theory of non-productive labor ........ 69 

All useful labor productive ......... 70 

Differentiation of productive effort . . . . . , . .71 

Gratified desires complete the cycle of effort ...... 72 

Land, labor, and natural forces the necessary factors in production . . 72 

Land passive, man and nature active . . . . . . ' Ti 

Nature and character of capital ........ 74 

Economic use of the term capital ........ 75 

Use of capital determined by increasing returns . . . . . 7^— 

Mistaken praise of parsimony ......... 77 

Capital the effect not the cause of industrial prosperity .... 78 

Capital arises from the hope of gain . . . . . . .79 

No use for capital in barbarism ........ 80 

Social consumption the cause of economic production .... 81 



xiv CONTENTS. 

PAGE 

Characteristic simplicity of physical wants ...... 82 

Complexity of social wants , . . . . . . . •'83 

Nature responds liberally only to large demand . . . . . 84 

New wants make large markets ........ 85 

High wages lead to low prices ........ 86 

Two kinds of discoveries under ancient and modern civilizations . . 87 

Why ancient civilizations were not self-sustaining 88 

Resume of laws of production ......... 8g 

CHAPTER II. 

ECONOMIC VALUE. 

Adam Smith's definition confusing ........ 90 

Relation of value and utility ......... 91 

Definition of value ........... 92 

Price and value identical . . . . . ... . 93. 94 

Value a relation between man and things ...... 95 

Mistaken point of view .......... 96 

Error of Mill and Cairnes 97 

Value is not the exchange ratio of things to things, but of things to man . 98 

Effect of the new point of view ........ 99 

CHAPTER III. 

DEMAND AND SUPPLY NOT THE LAW OF ECONOMIC PRICES. 

Economic price not governed by demand and supply .... 100 

Gregory King's law . . . . . . . . . . loi 

It applies to agricultural products ....... 102 

Not to manufactured products ....... 103, 104 

The theory does not fit the facts ........ 105 

Wages do not obey the law of supply and demand ..... 106 

Economic price the exchange of equivalents ...... 167 

Cost the basis of economic equivalence ....... 107 

Testimony of McCulloch . . _ . . . . . . . . 108 

Cairnes' error regarding supply and demand ...... 109 

Commodities do not create demand . . . . . . .110 

Demand the cause of supply . . . . . . . . .Ill 

Origin of price ..........' 112 

Initial point of supply . . -113 

Price phenomena originate in man . . . . . . . ^114 

CHAPTER IV. 

THE LAW OF ECONOMIC PRICES. 

Exchange ratio of wealth and service 115 

Meaning of economic law . . , . . . . . .116 



CONTENTS. 



XV 



Laissez /aire not scientific .... 

Economic law defined ..... 

JNIaximum and minimum price, how determined 
Cost the point of economic equilibrium . 
All the factors in production must receive the equivalent of what they con 
tribute ....... 

The possibility of an economic surplus 
Equity of economic law ..... 

How cost of production affects price 

Origin of economic profits .... 

Their equitable basis ..... 

Primary law of price ..... 

Character of price variations .... 

Prices in the same market tend to uniformity . 
Statement of law of prices .... 

Verification of the law of prices 

Agricultural prices ...... 

Relation of quantity to price .... 

All prices regulated by cost of dearest portion . 
Quality of labor determines its cost . 
Variation in wages ...... 



CHAPTER V. 



THE LAW OF THE COST OF PRODUCTION. 



Popular errors regarding cost of production 
Simple phenomena misleading . 
Ricardo's illustration 
Cost and quantity .... 
Brassey's experience in several countries 
High wages make cheap wealth 
Important relation of wages to machinery 
Use of capital, how determined 
Nature and function of capital 
Importance of large market 
Wages measure the laborer's consumption 
The true law of prices .... 



CHAPTER VI. 

MONEY AND ITS ECONOMIC FUNCTION. 

Walker's definition of money . . 150 

Money and wealth not identical . . 151 

Money an evidence of credit . . . 152 

Definition of money .......... 153 



2CV1 CONTENTS. 

FACE 

Function of money . . . " . 154 

Evils of fluctuations in the value of naoney , . . . . .155 

Of what should money be made ? . . . . . . . .156 

Essential attributes of money . . . . . . . . •157 

It must have maximum value in minimum form . . . . .158 

Claims of a tabular standard . . . . . . . . -159 

Its difficulties 160 

Need of a scientific price-level ........ 161 

Depreciation of money .......... 162 

Inadequacy of metallic money ........ 163 

Basis of a paper currency . . . . . . . . .164 

Necessity of gold and silver . . . . . . . . .165 

Because universally acceptable . . . , . . . .166 

Proportion between property and credit money ..... 167 

Herbert Spencer's view .......... 168 

Essentials of a sound monetary system . . . . . , .169 

How to regulate the quantity . . . . . . . , .170 

Advantages of private enterprise . . . . . . . .171 

Money should be- taken out of politics . . . . . . .172 



PART III. 
The Principles of Economic Distribution. 

CHAPTER I. 

THE DISTRIBUTION OF WEALTH. 

Distribution inseparable from production , . . . . .175 

It is an economic transfer. Difference between consumption and pro- 
ductive use ........... 176 

Function of productive wealth 177 

Order- of economic distribution . . . . . . . . 178 

Walker's inconsistency . . . . . . . . . .179 

Walker's doctrine of "residual claimant" fallacious . . . 180, 181 

Historic order of distribution . . . , . . . . ,182 

Economic order — wages, rent, interest, profit 183 

CHAPTER II. 

SOME RECENT THEORIES OF WAGES CONSIDERED. 

Wood's theory of wages 184 

Doctrine of final utility . . . . . . . . . . 185 

Mistaken application of ......... . 186 

Wages not uniform in all industries .187 



CONTENTS. 



XVll 



PAGE 

Laborers* welfare depends on absolute not relative income . . .188 
Capital sometimes yields no interest . . . . . . .189 

Wages not determined by rate of interest . . . . . . igo 

Xor must they be confounded with profit ...... igi 

Uniformity in wages and prices ; diversity in profits .... 192 

Prof. Clark's theory of wages ......... 193 

He, like Marx, confounds the last increment with the dearest . 194, 195 

Price-fixing increment not the same in manufacture as in agriculture . 196 

Confounding wages with rent ......... 197 

Price and surplusage .......... 198 

Defects of Prof. Clark's theory summarized ...... 199 



CHAPTER in. 



THE LAW OF WAGES. 

Requisites of a sound theory 

Definition of wages . 

Real and nominal wages . 

Wages the economic price of labor 

Statement of law of wages 

Wages determined by standard of living 

Prices of labor and>of products move differently 

Dearest laborers fix price of labor . 

Poorest capitalists fix price of commodities 

Relation betv/een wages and savings-bank deposits 

Difference in cost of living the source of savings 

Agriculture unfavorable to savings . 

Foreign laborers save more because they cost less 

Very highest-paid laborers strike ■ . 

Family income regulated by its cost 

ELow the cost of living is determined 

Remedy for low wages ..... 



. 200 

. 201 

. 202 

. 203 

. 204 

. 205 

. 206 

. 207 

. 208 

209, 210 

,. 211 

. 212 

. 213 

. 214 

• 215 

. 216 

. 217 



CHAPTER IV. 



RENT, ITS ECONOMIC LAW AND CAUSE. 



The Ricardo- Walker definition of rent 

Amended definition 

Economic production as applied to land 

The law of rent stated 

Rent governed by the law of surplusage 

Walker's explanation of rent . 

Fertility not cause of rent 

Rent has a social origin . 

Relation of rent to prices 



218 
219 
220 
221 
222 
223 
224 
225 
226 



XVlll CONTENTS. 

PAGE 

Economic basis of rent 227 

Effect of population on prices ........ 228 

Effect of improved methods ......... 229 

Rent follows and leads the movement of wages . . . . . 230 

Is rent a social tax ? .......... 231 

Difference in the economic order of using land and machinery . . . 232 

Relation of rent to wages illustrated . . . . . . . 233 

High wages cause of high rents ........ 234 

Effect of abolishing rent . . . . . . . . . .235 

Resume of the doctrine of rent ....,.,. 236 

CHAPTER V. 

THE LAW OF INTEREST. 



Interest related to capital as rent is to land 
Walker's view considered .... 

Not consistent with facts .... 

No-interest capital common .... 

Economic movement of capital 

Economic movement of interest 

Improved methods constantly push capital towards the no 

True law of interest ..... 

The law illustrated ...... 

Surplus enlarged by increased production 

Entrepreneur's profit comes from surplus above rent and interest 

The social character of interest ...... 



interest point 



237 

238 

239 
240 
241 
242 

243 
244 

245 
246 

247 
248 



CHAPTER VI. 



THE LAW OF PROFIT. 



Orthodox errors the source of socialistic theories ..... 249 

Employers' view of profit and wages ....... 250 

Theories of Rodbertus and Marx . . . , . . . .251 

Statement of Marx's theory of surplus value . . . . , .252 

Misleading illustrations .......... 253 

Fallacy of his theory demonstrated . 254 

Relation of labor to value . . . . . . . . .255 

Distribution of cost-items does not alter value ...... 256 

Cause of Marx's error .......... 257 

His mistaken assumptions ......... 258 

Economic evolution of profit ......... 259 

Equity of economic profit . . . . . . ... . 260 

Surplus does not prove exploitation . . . . . . . .261 

Ratio of product to profit and wages 262, 263 

Illustrated by cotton industry . 264 



CONTENTS, 



XIX 



Mr. Giffen's view of wages and product 

His error ..... 
Distribution of economic benefits 
Ratio of wages and profits to product 
Defective modes of calculation 

They lead to false conclusions 
Omitted data vitiate conclusions 
Salaries and depreciation of capital ovejlooked 
Wages have increased relatively to net product 
Relative decrease of profits ...... 

Correct mode of ascertaining economic condition of laborer 
Incompleteness of obtainable data ..... 

Table showing ratio of wages to profits .... 

Nature of industrial tendencies ..... 



PAGE 

265 
266 
267 
269 
270 
271 
272 
273 
274 
275 
276 

277 
278 
279 



PART IV. 

The Principles of Practical Statesmanship. 



CHAPTER I. 



LAISSEZ FAIRE AS A GUIDING PRINCIPLE IN PUBLIC POLICY. 



Origin of laissez-faire doctrine 

Adam Smith and the French Physiocrats 

Negative character of laissez /aire . 

Its erroneous postulates . 

False views of competition 

Misuse of the term natural law 

Natural and human selection . 

Survival of the unfittest . 

Government essential to society 

Character of economic competition . 

The competing units must be approximately equal 

The necessity of opportunity . . . . 



. 283 

. 284 

. 285 

286, 287 

. 288 

. 289 

. 290 

. 291 

. 292 

. 293 

. 294 

. 294 



CHAPTER II. 

THE STATE ; OR, THE NATURE AND FUNCTION OF GOVERNMENT. 

The state as distinguished from society ....... 295 

No absolute rights in society ..... ... 296 

All government is representative ........ 297 

The state is the authoritative expression of the aggregate .... 298 

Relation of the state to the individual ....... 299 



XX 



CONTENTS. 



PAGE 

Social-organism theory of Plato, Hobbes, Rodbertus, Marx, and Spencer . 300 
Spencer's claim that society is an organism, stated .... 301, 302 

His fundamental propositions considered ...... 303 

Radical distinction between society and an individual organism . . 304 

Society is not an organic entity . . . . . . . . 305 

Social evolution different from physical ....... 306 

Mr. Spencer logically supports socialism ....... 307 

Clark's attempt to apply this theory to economics ..... 308 

His position analyzed .......... 309 

The function of government . . . . . . . . .310 

Importance of mutual dependence . . 311 

Controlling principle in statesmanship . . . * . . . . 312 

Individual action preferable to state action . . . . . -313 

Difficulty of determining their respective spheres . . . . 314, 315 

Sphere of individual action . . , . . .. . . .315 

Sphere of state action ......... 316, 317 

Difference between protection and paternalism . . . . .318 

State functions essentially protective and educational . . . .319 

CHAPTER III 

THE PRINCIPLE OF INTERNATIONAL TRADE. 



Necessity of national development . 
Society a means for individual advancement 
The nation ....... 

Socializing tendency of manufacturing industries 

Importance of their development . 

A large home market necessary . 
Superiority of home over foreign market . 
Foreign markets and home wages . 
A nation is rich by what it uses, not by what it sells 
Test of economic cheapness .... 
False assumption of free-traders 
Operation of free trade illustrated . . 
Uneconomic competition .... 

Basis of economic competition 
Popular fallacies regarding the nature of a tariff 
The law of international competition 
Weakness of the infant-industry theory . 
Civilization depends upon protecting the higher against the lower 
India, Ireland, and Russia .... 
England, America, and Continental countries . 
Protection and home prices .... 
Proper mode of testing a tariff 
Ultimate effect of a protective tariff on profits . 



. 320 

. 321 

. 322 

• 323 

• 324 

• 325 

• 326 

• 327 
. 328 

329, 330 

. 331 

332, 333 

. 334 

• 335 
. 336 

• 337 
. 33S 

• 339 

• 340 

• 341 

• 342 
. 343 
. 344 



CONTENTS, X3^ 

PAG • 

Effect of protecting the higher wage-level 345 

Illustrated by cotton industry 346 

Led to improved methods of production ...... 347 

Effect on the industrial development in America ..... 348 

Wages in non-protected industries 349 

Erroneous views regarding ......... 350 

Mr. Blaine's mistaken view . . . . . . . . .351 

' Has not outgrown the English theory of wages ..... 352 

How protection affects wages . .. . , . . . .353 

Wages can only be raised by social forces . . . . . .354 

How to examine wages phenomena . . . . . . . -355 

Industrial improvement affects all classes ...... 356 

Effect of protection upon other countries . . . . . 357, 358 

How protection promotes the economic selection of industries . . -359 
It leads to free trade . . . . . ... . . . 360 

Its domestic application .......... 361 

CHAPTER IV. 

THE PRINCIPLES OF ECONOMIC TAXATION. 

Basis of equitable taxation 362 

It should come from surplus incomes . . . ... . . 363 

The mobility of taxes . . . . . . " . . . . 364 

Their relation to wages . . . . . . . . .365 

How transferred from laborer to employer ...... 366 

How he pays them out of his surplus ....... 367 

How his surplus is replenished from nature ...... 368 

Taxation like wages a form of consumption ...... 369 

Economic importance of taxation exaggerated ...... 370 

Taxes enable government to exercise its functions , . . . .371 

How taxes should be levied, paid, and collected . . . . , 372 

Evils of direct taxation . . ... . . . . . 373, 374 

Property and incomes tax . . . . . . - . . . 375 

Advantages of indirect taxation . . , . . . . . 376 

Taxes should be levied upon real estate ....... 377 

Equitable nature of a land tax ........ 378 

Objections answered . . . . . . . . . -379 

No profits on taxes. Mill's error ........ 380 

Taxation is public consumption of wealth . . . . . .381 

Henry George's delusion . .381 

CHAPTER V. 

BUSINESS DEPRESSIONS. 

How distinguished from famines . . . . . . . .383 

Historical facts about depressions ....... . 384 



xxu 



CONTENTS. 



Inadequate causes assigned 

Low consumption the real cause 

Evils attending factory system 

Indications of arrested consumption 

Mistaken industrial policy 

Economists largely responsible for this 

Sound economics would .,ead to their gradual extinction 

Two points which should be realized by capitalists . 

Increase consumption by raising wages . 

Improve laborers' social condition .... 

Necessity of an industrial barometer 

Idleness statistics should be frequently collected 



PAGE 

385 
386 

387 
388 
389 
390 
391 
392 
393 
394 
394 
39^ 



CHAPTER VI. 

COMBINATION OF CAPITAL. 

Social alarm created by spinning-jenny . . . . . . . 397 

Modern opposition to trusts of similar nature . . . . ... 398 

Relation of capital to consumption ........ 399 

Combination of capital raises the plane of competition .... 400 

Concentration of capital and competition ...... 401 

Efficiency not number of competitors the criterion of competition . . 402 

Economic incentive .......... 403 

Power of potential competition ........ 404 

Mobility of capital diminishes as that of comsumable wealth increases . 405 
Effect of no-profit capital ......... 406 

Limit of concentration .......... 407 

Purchasing power of wages and the concentration of capital . . . 408 
Effects of trusts on prices ......... 409 

Standard Oil Trust .......... 410, 411 

Its economy in utilizing waste . . . . . . . .412 

Its economies extended to other countries 413 

Trusts unlike corners . , . . . . . , . -414 



CHAPTER VIL 

COMBINATION OF LABOR. 

Combination of labor accompanies that of capital 

Both have an economic function . 
Objections to trades-unions 
Concentration the keynote of all progress 
False notions of individual freedom 
One-sided economics .... 
Impossibility of individual contracts 
Incompatible with industrial complexity . 



415 
416 
417 
418 
419 
420 
421 
422 



CONTENTS. XXlll 

PAGE 

Economic nature of labor organizations ....... 423 

Strikes and corners ......*..... 424 

Social contact essential to progress . , . . . . . -425 

It develops intelligence and refines manners ..... 426 

Social effects of labor unions ......... 427 

Economic effect of labor unions ........ 428 

Their relation to hours of labor and wages ...... 429 

They must be judged by their permanent effect ..... 430 

Gain and loss by strikes . . . . . . . . . -431 

Unfair criticisms ........... 432 

Trades-unions are necessary institutions ....... 433 

SUMMARY AND CONCLUSION. 

Character of social progress 434 

Nature of production and of value ........ 436 

Nature and order of distribution ........ 436 

Duties of statesmanship 438 

Ir^DEX 443 

Index TO " Wealth AND Progress " 449 



PART L 
THE PRINCIPLES OF SOCIAL PROGRESS. 



ERRATA. 

The table on page loi should read : 

1 tenth raises the prices above the common rate 3 tenths 

2 tenths " " " 8 tenths 

3 tenths " " " 1.6 tenths 

4 tenths " - " " 2.8 tenths 

5 tenths " " " 4.5 tenths 



Principles of Social Economics. 



CHAPTER L 

SOCIAL PROGRESS. 

Section I. — The Nature and Meaning of Social Progress. 

The promotion of social progress may be regarded as the 
primary object of all human institutions. The wisdom or un- 
wisdom of any form of government, political and industrial 
policy, or moral code — regardless of climate, country, or civiliza- 
tion — depends upon whether or not it tends to promote the 
social progress of the people. When we can furnish an adequate 
explanation of the law of social progress we shall be in a position 
to explain why the march of civilization has been so marked and 
continuous in some countries and so retarded in others ; why 
nations once the most advanced are now greatly in the rear ; 
why the ancients made such progress in art and philosophy, 
while they lacked simple contrivances with which to procure 
the common comforts and decencies of daily life ; why general 
poverty, religious, social, and political despotism prevail in some 
countries, while comparative abundance with religious freedom 
and political democracy obtain in others. '' The law of prog- 
ress," says Fiske,^ " when discovered, will be found to be the 
law of history. The great fact to be explained is either the 
presence or the absence of progress, and when we have formu- 
lated the character of progress and the conditions essential to it, 
we have the key to the history of the stationary as well as of the 
progressive nations. When we are able to show why the latter 
' "Cosmic Philosophy," vol. ii., pp. 195, 196. 
3 



4 THE KEY TO SOCIAL HISTORY, 

have advanced, the same general principle will enable us to show 
why the former have not advanced." Indeed, to explain the 
nature, law, and cause of social progress is not only to lay the 
foundation for the science of social economics, but it is also to 
furnish the key to social philosophy, and thereby to establish a 
rational basis for statesmanship and social reform. This in- 
volves, first of all, the consideration of what constitutes progress. 
Unless we understand what social progress is, there can be no 
intelligent consideration of the law and cause of its development, 
and hence no approximately correct science, either of economics 
or of government, is possible. 

Progress is commonly regarded as synonymous with improve- 
ment. This expression confounds the process with the product. 
It states what progress does rather than what it is. If asked what 
constitutes the progress of the plant, it would not be correct to 
say the flowers, buds, and foliage. Their condition correctly 
indicates the state of the plant's progress, but they no more con- 
stitute the progress than the apple constitutes the tree, or the 
barometer the storm. The progress of the plant consists of a 
series of changes that take place in its organization before the 
flower appears, and of which it is the result. So, too, of improve- 
ment. While progress usually implies a change for the better, 
the improvement is not the progress, but the result of it ; it is the 
change of form or condition which precedes and produces the 
improvement. Although all progress is simply change, all change 
is not necessarily progress. It may be retrogression. What then 
are the distinguishing characteristics of the changes which con- 
stitute progress ? Fortunately science has furnished the answer 
to this question, so far as physical development is concerned. 
The investigations of Linnaeus, Wolf, Goethe, Schelling, Von 
Baer, Darwin, and others have established the fact that the 
growth or progress of organisms, both vegetable and animal, 
consists of a series of structural changes from a relatively simple 
to a relatively complex state of organization. For more than 
half a century this definition of progress has so completely stood 
the test of verification that it has become an accepted scientific 
truth, and now both plants and animals are classified in the scale 
of development according to the simplicity or complexity of their 
organization. 



DEFINITION OF SOCIAL PROGRESS. 5 

If we examine the history of social institutions we shall find 
that this distinguishing characteristic of progress is equally true 
of society. Although the precise forms of the earliest phases of 
social life are difficult to determine, modern investigation has 
proved beyond question that society in its primitive stages was a 
homogeneous aggregate of human beings without industrial 
specialization or social or political individuality, and that all 
progress from that time to this has been a movement towards 
a greater complexity of life and definiteness of individual, social, 
and political functions. Progress in general, therefore, may be 
defined as a tendency to change from a relatively simple to a 
relatively complex organization. 

Although this movement from the simple to the complex is the 
distinguishing characteristic of all progress, the form it assumes 
in physical and social phenomena is very different. In all the 
phases of physical development the tendency is to produce a 
greater perfection, individuality, and freedom of the organism, — 
the highest type of which is man. Society is not an individual 
organism, but an association of individual organisms. Social 
development, therefore, does not consist in organic differentiation, 
but in the differentiation of the social environment of individuals. 

In considering social advancement, therefore, we are concerned 
only with social phenomena ; that is to say, with the influences 
which affect the material, political, and moral condition of man 
in society ; nor are we called upon to deal with the origin of the 
elements in his social character, but only with the development 
of their expression. 

The phenomena of society may be classified as social and 
economic ; the former relates to man's political and ethical life, 
and the latter to his industrial efforts. In order to correctly 
understand progress in society, it will be necessary briefly to 
consider the historic tendency of these two phases separately. 

Section II. — The Historic Tendency of Social Progress, 

Although the genesis of man is still an unsettled question, the 
fact that he once existed as a mere physical being scarcely 
superior to the lower animals is conclusively established.' 

* The wild men in the interior of Borneo are described by Dalton as living : 
" absolutely in a state of nature, who neither cultivate the ground nor live in 



6 THE JELLY-FISH PERIOD OF SOCIETY, 

Recent investigations have shown that primitive man was so 
devoid of social life and character as to neither cook his food 
nor build himself a hut to live in. In many instances the insti- 
tution of marriage was entirely unknown ; in others the conjugal 
ties were so slender that they existed only until the birth of the 
child. ^ The interminable struggle for life against the elements, 
wild beasts, and his fellows, made man's localization necessary, 
and brought him into social and personal relations that gradually 
assumed a more permanent or tribal character. This may 
properly be said to constitute the first stage of social existence — 
the jelly-fish period of society. Here the social homogeneity 
was such that every thing was owned in common — even wives 
and children. Authorities agree that " the primitive condition 
of man socially was one where every man and woman were 
regarded as equally married to one another," and " any woman 
who attempted to resist the marriage privileges claimed by any 
member of the tribe was liable to severe punishment." ^ The child 
had no particular father or mother, but belonged to the tribe.^ 

The struggle for existence being now between tribes, war was 
the chief occupation, and those who were most proficient and 
brave as warriors naturally became the most honored and 
influential leaders of the tribe. One of the chief characteristics 
of tribal warfare was that the will of the victor became the law 
of the vanquished. Accordingly, if the chief desired to take a 

huts, who neither eat rice nor salt, and who do not associate with each other, 
but rove about some woods like wild beasts ; the sexes meet in the jungle, or 
the man carries away a woman from some campong. When the children are 
old enough to shift for themselves, they separate^ neither one afterwards think- 
ing of the other. At night they sleep under some large trees, the branches of 
which hang low." Sir John Lubbock's *' Origin of Civilization," pp. 5, 6 ; 
Ibid.^ chapter iii. See also Lichtenstein's " Travels in South Africa," p. 137 ; 
*' Expedition to Borneo," vol. ii., p. 10 ; Lubbock's " Prehistoric Times," pp. 
563-5, 595, 596; Lyell's "Antiquity of Man,"' pp. 377-80 ; Sproat's "Scenes 
and Studies of Savage Life," p. 120 ; Dubois' '* Description of the People of 
India," p. 3 ; " Transactions Ethnological Society," new series, vol. iii., p. 248. 

^Lubbock's " Origin of Civilization," pp. 53-57. See also Sir Edward 
Belcher's " Transactions Ethnological Society," vol. v., p. 45 ; Starke's 
"Primitive Family," pp. 82-84. 

2 Lubbock's "Origin of Civilization," p. 67; Starke's "Primitive Family," 
p. 245 ; McLennan's "Primitive Marriages," pp. 229, 230. 

^ Lubbock's " Origin of Civilization," p. 71. 



THE FAMILY THE SOCIAL UNIT, 7 

woman from among his war captives, he could have the exclusive 
use and enjoyment of her as against any and all other members 
of the tribe/ This instituted a departure from tribal homoge- 
neity which naturally led first to a certain degree of personal 
domestic exclusiveness, then to individual marriages, and finally 
to the family group. Thus, through the gradual process of social 
differentiation and integration, society was slowly transformed 
from a simple homogeneous mass, in which the tribal aggregate 
was the only unit, into a relatively complex social organization 
with the family as the unit, possessing definite social functions, 
rights, and powers. It should be remembered, however, that 
this social individuation conferred no rights or powers upon the 
individual, but only upon the family.^ Indeed, it is a universal 
law in society that the exercise of social rights extends only with 
the growth of the social unit. Hence, when the family became 
the unit, it acquired all the social rights and powers of the unit. 
But all rights absolutely stopped at this point. The individual 
members of the family acquired no more social recognition by 
this change than had been previously accorded to the individual 
members of the tribe. The family was recognized solely through 
its male head, whose power was absolute, even to life and death. 

With the settlement of the family came the necessity of culti- 
vating the lands. This led to the substitution of an agricultural 
for a pastoral life, and the right of private for public ownership 
in land and its products." 

Another feature of this rigime was the practice of enlarging 
the family by enforced or voluntary adoption ; those entering the 
family by this means were kinsmen ; — a fiction that nothing but 

* " A war captive, however, was in a peculiar position ; the tribe had no rights 
to her ; her capturer might have killed her if he chose ; if he preferred to keep 
her alive he was at liberty to do so ; he did as he liked, and the tribe was no 
sufferer." Sir John Lubbock's " Origin of Civilization," p. 71 ; also McLen- 
nan's " Primitive Marriages," pp. 43, 44. 

^ " At the outset, the peculiarities of law in its most ancient state lead us 
irresistibly to the conclusion that it took precisely the same view of the family 
group which is taken of individual men by the system of rights and duties now 
prevalent throughout Europe." — Maine's " Ancient Law," p. 129. " But 
ancient law, it must again be repeated, knows next to nothing of Individuals. 
It is concerned not with Individuals, but with Families ; not with single human 
beings, but with groups." — Ibid., p. 250. "^Village Communities," p. 10. 

^ Maine's " Early History of Institutions," pp. I, 2, 73-79* 



8 THE PATRIARCHAL FAMILY. 

the absolute authority of the head of the family could have estab- 
lished. In this way the simple primitive family made up of blood 
relations, was expanded into the patriarchal family, held together 
by the tie of a mythical kinship/ Greater sacredness of, and 
protection to, life and property came with this higher state of 
organization, and " marriage by capture " gave place to marriage 
by purchase, transferring the selection of a wife from the muscu- 
lar authority of the savage suitor, to the civil authority of the 
parent.' 

These social relations continued theoretically until the Chris- 
tian era, and practically until the middle of the sixth century. 
From the time of the Twelve Tables, e.g., 450, to that of 
the Justinian Code, progress was very tardy, but tended tow- 
ards a further differentiation of the social polity in the direc- 
tion of substituting the individual for the family as the social 
unit. This movement, which is most distinctly indicated by 
the innovations made upon the domain of patria potestas (the 
authority of the father over the person and property of his de- 
scendants), though imperceptible during the latter four hundred 
years of the Republic, began to show itself in the early days of 
the Empire. 

If we pass from the ancient to the modern world, where social 
progress has been more marked, we shall find that its movement 
has been everywhere distinguished by the same general charac- 
teristics. During the savage struggle for imperial supremacy 
which covered the face of Europe for nearly four hundred years 
after the fall of the Western Empire, in which all permanent 
authority and recognized law were practically abolished,^ the patri- 
archal system virtually disappeared and society reorganized into 
the feudal system. Social institutions then assumed a different as- 
pect. Instead of being composed of family groups, held together 

^ We must look on the family as constantly enlarged by the adoption of 
strangers within its circle, and we must try to regard the fiction of adoption as 
so closely simulating the reality of kinship that neither law nor opinion makes 
the slightest difference between a real and an adoptive connection." — Maine's 
"Ancient Law," p. 128. See also "Early History of Institutions," p. 310; 
"Village Communities," p. 115 ; Lubbock's " Origin of Civilization." 

^Maine's "Ancient Law," pp. iig-133 ; cf. Lubbock's "Origin of Civili- 
zation," p. 52 ; " Fiske's " Cosmic Philosophy," vol. ii., pp. 220, 221. 

' Guizot's " History of Civilization," pp. 6, 6g ; also Hallam's " History of 
the Middle Ages," vol. i., p. 92. 



SOCIAL CHARACTER OF FEUDALISM. 9 

by a mythical kinship under parental despotism, subject to impe- 
rial absolutism, society consisted of manorial or baronial groups, 
held together by mutual dependence upon the land-owner, who, 
while giving nominal allegiance to the king, was practically inde- 
pendent of him.' The individual instead of the family was the 
social unit, and industrial interest instead of kinship was the 
cohesive principle in society ^ ; land, or wealth, instead of birth, 
became the basis of rank and authority.' 

No sooner had feudalism become the settled order of society 
than the process of further social differentiation set in. One of 
the earliest evidences of this was the localization of the serfs 
on the estates of the respective barons, and their division into 
classes as " hinds " and " artificers." By this division of labor 
the former became permanently ruralized, and the latter central- 
ized, into groups whose history is that of modern civilization. 
During the tenth century these groups grew into permanent towns 
and became the centres of trade and industry. As they increased 
in population and wealth they grew in social activity, intelligence, 
and power ; and hence became the permanent source of the 
further division of labor, the specialization of social and religious 
functions, and of personal and political rights. 

By the middle of the eleventh century we find the burghers 
asserting their right to the ownership of property, and forcibly 
resisting the efforts of the barons to despoil them. Early in the 
twelfth century the towns began to obtain the right of local self- 
government. During the thirteenth and fourteenth centuries the 
serf was differentiated from the lord's estate, and became an 
economic and social individual. The separation of political in- 
stitutions from the authority of the Church, and the power of 
Parliament over the Crown were also positively asserted during 
this period. 

^ " The kingdom was as a great fief, or rather as a bundle of fiefs, and the 
king little more than one of a number of feudal nobles, differing rather in dig- 
nity than in power from some of the rest." — Hallam's " History of the Middle 
Ages," vol. i., p. 136. 

^ " It was feudalism which for the first time linked personal duties, and by 
consequence personal rights, to the ownership of land." — Maine's "Ancient 
Law," p. 102. 

^ Hallam's " Middle Ages," vol. i., p. 88; also ibid,, p. 122, and Guizot's 
'* History of Civilization," p. 67. 



10 FREE CITIES AND THE MIDDLE CLASS. 

This was followed in the fifteenth and sixteenth centuries by a 
general breaking up of the feudal system and a new formation of 
social institutions. Throughout Europe the political elements 
integrated into definite nations/ The gentry and inferior no- 
bility, who were economically and socially segregated from their 
class, and the superior artisans who, by the growth of manufac- 
ture and trade in the Free Towns, had become '' master artificers," 
formed a new social stratum — the mercantile or middle class — 
which henceforth became the enterprising and progressive ele- 
ment in society. With the rise of this class came a new era in 
civilization. Under its influence industrial, political, and reli- 
gious institutions were revolutionized. In this period the dis- 
covery of America and the passage to India by the Cape of Good 
Hope, and the use of the mariner's compass were consummated ; 
painting with oil and the manufacture of paper from linen were 
invented ; the right of private judgment in religion and the 
supremacy of parliamentary government were permanently estab- 
lished. From this came the use of steam, the invention of the 
spinning-jenny and the power-loom, and the establishment of 
the factory system, the railroad, steamship, and telegraph, with 
their natural accompaniments — the daily press, cheap books, and 
popular education. 

As the outgrowth of these movements slavery has been abol- 
ished from Christendom and the principle of civil and religious 
freedom for the individual, without regard to caste, color, race, 
or sex, has been established in the most advanced countries, and 
is destined to be extended to the whole human race. 

Thus the universal tendency of progress in society is to in- 
crease the power, rights, and freedom of the individual, and 
diminish the arbitrary control of collective authority. 

Section III. — Historic Tendency of Economic Progress, 

Upon the principle that all progress is governed by one general 
law, it is commonly supposed that progress must assume the 
same form in economics that it does in society and politics. 
Consequently, because social progress tends toward greater 
democracy of administration, it is held that industrial progress 

^ Guizot's " History of Civilization," chap. xi. 



CHARACTER OF ECONOMIC PROGRESS. II 

must be in the direction of the public administration of industry. 
A little reflection will show this to be a mistake. Although 
industrial progress has a tendency toward greater specialization, 
the form it assumes differs from that in social and political 
institutions, as much as progress in the latter differs from that 
in physical phenomena. 

The essential difference between political and industrial insti- 
tutions is that the utility of the former consists in their harmoni- 
ous adaptation to the social habits and character of the people, 
whereas the utility of industrial institutions consists in their 
economic efficiency — their capacity of furnishing wealth cheaply. 
Since social institutions will necessarily more completely reflect 
the desire and character of the people in proportion as the masses 
participate in their construction, it follows that progress in 
society is a tendency towards democracy of administration of 
political and social affairs. With economics the case is different. 
No advantage can accrue to the laborer or the community by any 
change of industrial institutions which does not enable the la- 
borer to obtain more wealth for a day's work. Whether industry 
is conducted on the democratic town-meeting plan, or by a few 
private individuals, cannot possibly affect the welfare of the com- 
munity, except as it promotes that end. Unless democracy of 
industrial administration would cheapen wealth, it would be a 
burden upon the community, without any compensating advan- 
tage, since it would involve the care of management without any 
beneficial result. 

A brief survey of the history of industrial progress will show 
that the increasing efficiency of productive methods, and hence 
the improvement of the means of getting a living, has two 
characteristics. One is the division and concentration of labor 
power, the other is the increase and social diffusion of political 
power. The former tends to specialize and limit the laborer's 
econof&ic function, the latter tends to generalize and extend his 
social funbtion. Thus, as the laborer's industrial individuality 
diminishes, the influence of his social and political individuality 
increases. 

Primitive industry, like primitive society, was very simple and 
homogeneous. Every one performed practically all kinds of 
labor with equal proficiency. Progress from that point to the 



12 MISTAKEN NOTIONS ABOUT FREEDOM. 

present has been a continuous tendency toward a greater divi-j 
sion, and specialization of labor and concentration of capital/ 
The tendency of this movement has ever been to differentiate 
productive force into numerous portions, integrating the laborer 
and machinery upon special branches, every one of which is 
dependent not only upon the action of the others, but upon the 
united action of the whole. Thus industrial differentiation, in- 
stead of increasing, tends to diminish the economic individuality 
of the laborer. It is because of this tendency to make the laborer 
an almost automatic part of a highly complex productive ma- 
chine, that the present industrial system is regarded as inimical to 
his social freedom. Those who take this view, and they are very 
numerous, lay great stress upon the fact that the laborer is an 
employe. To them the very stipulation of income means limita- 
tion of freedom. Of all the objections urged against the wages 
system, this is probably the most universal, and is regarded as 
the most fundamental. They think the only conditions under 
which social freedom is possible, is where the laborers employ 
themselves. The fallacy in this position arises from a miscon- 
ception of the idea of freedom. Freedom is not a mere theoretic 
form, but a sturdy fact. It does not consist in the formal per- 
mission, but in the actual power, to go or to do. Nothing can 
give social and political freedom but wealth ; the freedom that 
wealth affords does not depend upon whether the laborer works 
for himself or for another, but it depends entirely upon howmuch 
wealth he receives. There is no power in nature, society, or 
government that can make a poor man free. Poverty is social 
weakness ; it is the source of slavery, and the background of 
despotism. 

Social well-being consists not so much in doing, as in having. 
In proportion as man's energies are expended in obtaining a living, 
the possibilities of his social, intellectual, and moral life and de- 
velopment are restricted. In order, then, to maximize man's 
social individuality, it is necessary to minimize the expenditure 
of his physical energy. This is precisely what the division of 
labor, the concentration of capital, and the development of the 
factory system promote. 

The de-individualization of the laborer as a producer promotes 
his social advancement in many ways. In the first place, it makes 



INFLUENCE OF THE WAGES SYSTEM. 1 3 

the wages or stipulated-income system necessary. In proportion 
as the income of any class becomes stipulated, it becomes less 
contingent. To the extent that this occurs, material subsistence 
becomes more certain, which is the first step toward social and 
intellectual development. So long as the laborer's living is 
uncertain, he is in a more or less constant state of anxiety and 
suspense, which tends to make progress in the higher phases of 
social life impossible. 

Another beneficial feature of this tendency is that it concentrates 
the laborers, and specializes their occupations. By this means 
they are not only forced into closer and more frequent intercourse 
with each other, but it also increases their mutual interdependence. 
The material condition of the masses cannot be improved, nor 
can their political freedom or social character be developed, by 
any thing which does not increase the economic interdepend- 
ence of the people, and weld them together in social classes. In 
proportion as this process of social differentiation increases, 
interests and sympathies broaden, altruism is developed, and the 
welfare of all becomes identical with that of each. Nothing so 
surely aids social advancement as that which makes it necessary 
for millions to rise together. No industrial system, no civiliza- 
tion, no religion even is worth sustaining which only saves a few. 

Another feature of the wages system is the tendency to promote 
more constant employment. There is no fact more conclusively 
established in the history of industrial progress than that the 
concentration of capital in fixed plants and large enterprises 
makes a marked increase in the permanence of employment. 
As industrial establishments increase in size, constant employ- 
ment of capital becomes necessary. The loss involved in the 
short stoppage of a large factory will soon be more than equal to 
the profit of a year's business. Whatever increases permanence 
in the use of capital necessarily increases the constancy of 
employment. Thus, as the factory methods develop, the capi- 
talist has to pay the penalty for enforced idleness through loss or 
bankruptcy ; and hence permanent employment becomes one of 
the features of the industrial expertness of capitalistic manage- 
ment. Under the individual or self-employing regime this was 
not the case. When the hand weaver failed to sell his cloth or 
make a living, he could starve, beg, go to jail, or die, as the case 



14 ECONOMIC PROGRESS DEFINED. 

might be. His poverty involved nobody else, while under the 
wages system the great capitalist, nay, the whole community, 
is involved with the enforced idleness of the laborer. 

Accordingly, the world over, we find that permanence of 
employment increases and enforced idleness diminishes where 
the wages system is most developed and capital most concen- 
trated. This is clearly shown by the currents of emigration. 
People always leave those localities and countries where employ- 
ment is the most precarious and least remunerative, and move 
towards those where it is most permanent and best rewarded. 
Hence the tendency of emigration is always from those coun- 
tries where the wages system and factory methods are least 
developed, to those where they are most highly developed. It 
is from China, Bohemia, Austria, Italy, Germany, and Ireland, 
towards England and America, that laborers emigrate, and not 
from England or America to Continental Europe and Asia. 

The industrial system, which tends to socialize the laborer, in- 
crease the economic interdependence of the capitalist, consumer, 
and workman, and make the material well-being of the masses 
the basis of business success, necessarily possesses all the possi- 
bilities of an ever-advancing civilization. Progress in politics and 
society, therefore, may be defined as the tendency to increase the 
sovereignty of the individual and diminish the arbitrary authority 
of the state by establishing greater democracy of administration. 
In economics i't may be defined as the tendency to centralize 
industrial administration and responsibility, de-individualize the 
laborer as a producer and socialize the results in better and 
cheaper products. 



CHAPTER II. 

THE LAW OF SOCIAL PROGRESS. 
Section I. — The Elements of Social Progress. 

In the preceding chapter two facts were established. First, 
that social progress is the movement of society toward the reali- 
zation of the highest material, intellectual, and moral possibilities 
in human life ; /.<?., toward the plane of greater human well- 
being. Second, that this progressive movement consists in a 
series of changes from a relatively simple to a relatively complex 
state of social organization. We now come to the consideration 
of the law by which this movement takes place ; that is to say, 
the order in which the different phases of social phenomena are 
developed. These may be grouped under three general heads, 
as the material, the intellectual, and the moral. The material 
element in social progress is not merely that which relates to 
man's physical necessities, but every thing that relates to his 
wants and desires, of whatever kind, — the gratification of which 
involves the production of wealth. These will be found to in- 
clude, not only the necessities for food and shelter, but those for 
education, art, travel, intellectual and moral culture, and even 
religion. In fact, there are no desires of which man is capa- 
ble whose gratification does not directly or indirectly necessitate 
the production of wealth. The material element in social 
progress, therefore, includes every thing which relates to the 
gratification of human wants, desires, and aspirations. The intel- 
lectual element is that which relates to man's capacity to acquire 
and apply knowledge ; it is the analyzing, reasoning, judging, 
and directing element. Morality simply relates to the quality of 

15 



1 6 THE ORDER OF SOCIAL PROGRESS. 

human conduct. We designate conduct as moral or immoral 
according as it directly or indirectly tends to promote or retard 
social well-being or human happiness. 

While these phenomena are distinct in their character they are 
inseparable in their relation ; hence no differentiation can result 
in permanent integration and specialization which does not find 
expression in all these phases of social life/ If the development 
of any one of these elements should be promoted at the expense of 
the rest, it must necessarily fail of its function because not one of 
them can permanently exist without the sustaining influence 
of the others. The increased production and accumulation of 
wealth, for example, could not continue without the increase of 
intelligence to devise the means necessary to produce it, and 
a corresponding advance in the social integrity to sustain it. A 
general advancement of intelligence is impossible without the 
relative elimination of poverty and vice ; and no considerable 
advance in ethics can take place without a previous increase in 
material well-being. 

Section II. — The Natural Order of Social Progress, 

Although the various elements of social development are in- 
separably connected with, and constantly act and react upon 
each other, one of them must necessarily sustain the initiative 
relation to the others, or no movement could take place. Which 
of these occupies that position ? The answer to this question 
must explain the relative position these elements occupy in the 
scale of development and the historic order of their appearance, 
— both of which are indicated by their functional relations. 

Morality, being the quality of conduct, necessarily arises from 
motives, decisions, and actions, and hence must be a resultant of 
the other elements. Morality is the fruit and not the root ; it is 
the objective point towards which progress tends, and conse- 
quently is the last to be developed.'' The intellect, as already 
explained, is the reasoning, analyzing, judging faculty ; its func- 
tion consists exclusively in adapting means to an end. It 
occupies the position of servant and guide to the other faculties. 

^ ' ' The progress of society is not moral progress, or intellectual progress, or 
material progress ; But it is the combination of all the three." — Fiske's " Cosmic 
Philosophy," vol. ii., p. 245. 

' Ward's "Dynamic Sociology," vol. i., p. 216. 



MATERIAL PROGRESS THE FIRST. 1 7 

Human activities are never exerted except for the gratification of 
some desire, want, sympathy, sentiment, or ambition arising in 
the feelings. Intellectual or physical effort put forth without 
some motive or desire would be senseless.^ Of necessity, there- 
fore, the material element in social progress is first in the scale of 
development and supplies the motive which calls the intellect 
into activity. All the inventions and discoveries in manufacture, 
science, and literature, all the doctrines of economics, ethics, 
politics, and religion have been produced by the intellect in its 
effort to gratify the desires. These efforts have been perpetuated 
or abandoned in proportion as they were found, by experience, 
to be favorable or unfavorable to human well-being. 

Clearly, therefore, the natural order of the various elements in 
social development is : the material, the intellectual, the moral ; 
the material being the basis or motor force, the intellectual the 
means, and the moral the result.'* 

Although the fact that progress of society has always been in 
the ascending order — from the material to the moral — has been 
generally recognized as a matter of history, it has been almost 
uniformly ignored as a principle in social philosophy. 

There appears to have been an undefined apprehension that to 
permanently regard the material as the preponderating element 
in human progress is to belittle the influence exercised by the 
intellect upon the advance of civilization. This is a mistake. 
The danger of inverting the order of its operation is what is most 
likely to occur. It is precisely at this point that some of the most 
fatal errors have entered the popular theories. The best writers 
agree that in the early stages of social growth the material 
element is first in order and influence, but seeing that the mate- 
rial conditions and moral character advance more rapidly as the 

^ Comte's "Positive Philosophy," pp. 384—500. 

^ " The same may be said of all the so-called virtues — ^honesty, benevolence, 
justice, etc. These qualities are the result of his civilization. His moral 
nature has sprung from his rational faculties, and may be traced back to its 
origin in sympathy : at first confined to his immediate companions or offspring ; 
thence gradually extended to embrace his own clan ; then his particular tribe, 
race, or country ; then, to a limited degree, the whole human race ; and lastly, 
as exhibiting the highest type, and quite rare even among the most civilized, 
made to comprehend the lower brute creation in one beneficent scheme of 
.morals." — Ward's " Dynamic Sociology," vol. i., p. 461. 
2 



1 8 COM TE * S MIS TA KE. 

intellect develops, they appear to assume that the order of prog- 
ress changes and the intellectual instead of the material element 
becomes the dominating influence in social progress. Even 
Comte says : " If our affective faculties were subordinated to the 
intellectual, all idea of improving the social organism would be 
senseless. ... For our affective faculties must preponderate, 
not only to rouse the reason from its natural lethargy, but to give 
a permanent aim and direction to its activity, — without which it 
would be ever lost in vague, abstract speculation." ^ After 
having thus affirmed the truth of the ascending order, he says : 
^' This is the natural order ... whereas the reverse is the 
rational one and that which gains upon the other in proportion 
as the intellect assumes a larger share in the human evolution.'"^ 
Thus, according to Comte, upon the dawn of the human intellect, 
the natural order became irrational. Buckle, Draper, and Guizot 
all take practically the same position. Though they do not go 
through the same course of reasoning that M. Comte does, they 
act upon the same conclusions. They all admit that material 
conditions must precede intellectual and moral development, and 
then insist that the intellect is the source of human progress.'' 

For the assumption that the order of evolution is thus reversed 
by the accession of the intellect there is no warrant either in rea- 
son or fact. That the material element in progress is greatly 
accelerated by the reflex action of the intellect, and the intellec- 
tual by the moral, and that progress is greatly enhanced thereby, 
is unquestionable. But that in no way implies any change in the 
law of social movement. The fact that the intellect fills a much 
larger sphere in human life than it once did, does not tend to show 
that it has in any way changed its relative position. The differ- 
ence in the activities of man in modern civilized society and 
those of his savage ancestors simply represents the difference in 
the quality and quantity of his desires. The intellect, by the 
very nature of its function, is not a propelling, but a guiding 
element. It is the servant and not the master of human wants. 

* " Positive Philosophy," p. 500. American edition. 

"" Ibid., pp. 685, 686. 

2 Buckle's " History of Civilization," vol. i., pp. 30, 31 ; cf. also pp. 242 
and 509 ; Draper's " Intellectual Development of Europe," p. 591 ; Guizot's 
" History of Civilization," pp. 66, 84, 85, and 230. 



THE INTELLECT OBEYS THE WANTS. I9 

The operation of this principle is clearly illustrated in the social 
effect of the discovery of the mariner's compass, the art of print- 
ing, the use of gunpowder, etc. It was not until some consider- 
able portion of mankind desired the products of other nations 
that navigation became necessary and the mariner's compass 
could be of service to man, while gunpowder and printing, 
having been invented before the desire for them was developed, 
had to wait thousands of years before they could exercise any 
influence upon civilization.' Although our acquisitions in sci- 
ence, art, labor-saving inventions, etc., are the work of the intellect, 
it is only when those achievements minister to human wants that 
its activities tend to promote human progress. 

It is true, however, that the influence of a new acquisition by 
the intellect seldom fully expands itself in the satisfaction of the 
wants to which it directly relates, but it frequently exercises a 
reflex influence, the tendency of which is to again increase the 
desire and consequently still further stimulate its own activity. 
For example, the art of printing not only increased the number 
of books sufficiently to supply those who had already acquired a 
positive desire for reading, but it so cheapened them as to put 
them within the reach of a large class to whom such a luxury had 
previously been impossible, — thereby greatly increasing the desire 
for, as well as the possibilities of, obtaining knowledge. Again, 
when the power-loom and the spinning-jenny were invented, 
they not only enabled the manufacturers to supply the increasing 
demand for cotton cloth, but they so reduced its price that it could 
become an article of common use among the masses. This fact 
naturally soon gave rise to such desires for other and superior 
fabrics that the result was to ultimately revolutionize the industrial 
system of all Europe. 

It is therefore not true that the natural order of social evolu- 
tion is changed by the development of the intellect. To whatever 
extent the sphere and activities of the intellect may be increased, 
its relative position and function must, by the very nature of its 
constitution, remain the same. 

A similar error prevails in regard to the position of ethics in 
social progress. Because personal morality, commercial integ- 
rity, industrial equity, and social harmony are seen to increase 
^ See Part II., chapter i. 



20 ERRORS REGARDING ALTRUISM, 

as the altruistic feelings advance in society, it is held that altruism 
and egoism are essentially antagonistic to each other. Egoism is 
a term usually employed as relating to self, and altruism as relating 
to others ; hence all actions and feelings are regarded as egoistic 
in proportion as they tend to promote the welfare of self to the 
exclusion of others ; and conversely they are altruistic in pro- 
portion as they tend to promote the well-being of others to the 
exclusion of self. 

From this position it has been consistently inferred that self- 
interest is inimical to the well-being of society. The natural 
effect of such a conclusion is to create an aversion to all indus- 
trial institutions in which this principle is recognized and to 
stimulate the demand for a reconstruction of society on a so- 
called altruistic basis. This reasoning involves a misconception 
of the terms egoism and altruism and their logical relation to 
each other. It is a radical error to regard altruism as anti- 
egoistic, — or even non-egoistic, in its influence. To injure or 
ignore the well-being of self is to destroy the first essential con- 
dition for promoting the welfare of others. We can only be 
helpful to others in proportion as we are well provided for our- 
selves.^ The poor, the weak, and the inferior are always a 
burden rather than a help to their friends. 

Egoism may be defined as relating to the welfare of self ; and 
altruism as relating to the welfare of self and others. The basis 
of true altruism is successful egoism. Altruism differs from 
egoism, not in being opposed, or even indifferent to, the interests 
of self, but only in embracing the interests of others besides self-. 
Thus all real altruism is highly egoistic, though all egoism is not 
altruistic. All conduct may be called relatively altruistic accord- 
ing as it benefits more than one, and relatively egoistic as it 
benefits less than all. It is a mistake, therefore, to conclude that 
altruistic conduct in society can be increased only as the princi- 
ple of self-interest is diminished. 

There is, moreover, unconscious and conscious altruism. The 

^ ' ' The acts required for continued self-preservation, including the enjoyment 
of benefits achieved by such acts, are the first requisites to universal welfare. 
Unless each duly cares for himself his care for all others is ended by death ; and 
if each thus dies there remains no other to be cared for. This permanent 
supremacy of egoism over altruism, made manifest by contemplating existing 
life, is further made manifest by contemplating life in the course of evolution." 
— Spencer, " Data of Ethics," pp. 187, 188. 



THE LAW OF SOCIAL PROGRESS, 21 

former is altruistic conduct prompted by egoistic motives ; the 
latter is that inspired by altruistic motives. In the progress of 
society unconscious altruism precedes and tends to develop con- 
scious altruism. Much the larger portion of the altruistic con- 
duct in the world to-day is of the unconscious class. The great 
improvements in manufacture and commerce that have put so 
many luxuries and refinements within the reach of the average 
citizen have, for the most part, been created by egoistic motives. 
It is because the industrial policy of the employing class has been 
dominated too much by the idea of benefiting self to the exclu- 
sion of others that it has received so many disastrous checks. 
We shall hereafter see that industrial depressions, bankruptcies, 
enforced idleness, and their accompanying evils, are the economic 
penalty for ignoring the interests of others in the efforts to bene- 
fit self. Those who are excluded from the benefits we enjoy 
become a menace to our well-being and a hindrance to our prog- 
ress ; and conversely, the more completely the welfare of others 
becomes identical with our own the more is our own increased. 
Altruism, then, is not opposed to egoism ; it is simply a higher 
phase of it. Obviously, altruism — the highest form of ethical 
conduct — is the consequence of broadening the egoistic activities 
of the material and intellectual elements, and hence is necessa- 
rily last in the order of development. We are therefore war- 
ranted in concluding that the progress of society toward greater 
complexity of organization, in which the necessity of physical 
effort is diminished, intellectual power and personal freedom 
increased, and moral character elevated, is always in the ascend- 
ing order from the material to the intellectual and moral ; — the 
material being the basis, the intellectual the means, and the moral 
qualities the result. 

What then are the influences by which exclusive egoism is 
transformed into all inclusive altruism, and savagery is converted 
into civilization ? To answer this question is to explain the cause 
of social progress and will be the subject of the next chapter. 



CHAPTER III. 
THE CAUSE OF SOCIAL PROGRESS. 

It is not enough to known what progress is, or even to know 
the law of progress ; but the cause of progress must also be under- 
stood before a true system of social philosophy can be established. 

We have seen : (i) that social progress consists in changes of 
man's social polity, or institutions, and not in his physical organ- 
ism ; (2) that while all progress is change, only those changes 
are progressive which tend to further social differentiation ; (3) 
that while there can be no social progress without differentiation, 
only that differentiation is progressive which results in new inte- 
grations and greater complexity of social relations. 

What then is the force which produces the changes that result 
in integrating differentiation ? If we examine the history of 
social institutions from their simplest beginnings, or trace them 
from their most complex stages back to the earliest times, we 
shall find that every change in the polity of society — whether in- 
tellectual, political, moral, or religious — has been brought about 
by man's conscious effort to adapt social institutions to his own 
needs and desires. Social institutions are established by man 
exclusively for men. It may be said that the changes in social 
institutions are the work of the human intellect ; that, where 
man's social wants are the most numerous his physical and intel- 
lectual activities are the most varied and all phases of social 
institutions are the most highly differentiated. In the last analysis 
the proximate cause of social progress is human wants. 

In the first place, it will be observed that all desires, of what- 
ever character, are simply states of feeling, the distinguishing 
characteristics of which are pleasure and pain. In proportion as 



DESIRE THE CAUSE OF EFFORT. 23 

pleasure exceeds pain in human experience happiness prevails 
and life becomes attractive and desirable ; and conversely, as pain 
exceeds pleasure misery prevails and life becomes undesirable. 
These antithetical states are completely represented in the terms, 
want and satisfaction. Want is pain ; satisfaction is pleasure ; 
and the extent to which the latter exceeds the former is the true 
measure of happiness. To increase the proportion of pleasure 
to pain, therefore, is the primary purpose of all human effort and 
the immediate cause of social differentiation. Although all effort 
is exerted for the gratification of some desire, there are many 
desires that fail to call forth sufficient effort for their satisfaction. 
Effectual desires are those which incite the necessary activity for 
their gratification ; those which fail to call out such effort are in- 
effectual. Only effectual desires cause progress. Why are some 
desires effectual and others ineffectual ? it may be asked. Upon 
what principle is effort expended for the satisfaction of some 
wants and not for others ? A moment's consideration will show 
that this is all determined by the relative degree of pain and 
pleasure involved. Hence, the gratification of any given desire 
must finally turn upon the choice between a relatively painful 
want and a relatively painful effort, the decision always being in 
favor of the minimum pain. If this be true, it follows that human 
wants are not only the cause of social progress, but that advance- 
ment toward a higher plane of happiness can only take place on 
the egoistic principle of obtaining the maximum pleasure for the 
minimum pain. 

It thus appears that self-interest in man is not an evil element, 
as we have been taught to consider it, but that the principle of 
egoism affords the basis of, and inspiration to, social develop- 
ment. Man in his most primitive state was exclusively egoistic 
in his desires and in his conduct. Altruism was not visible in 
any thing that he did. Having no social or physical interest in 
his fellow-man, there was no more economic or ethical reason, 
why he should not steal from, or even kill and eat, him, than 
that the lion should not devour the lamb. 

As his wants became more numerous the efforts to satisfy them 
became more burdensome, and the contest between want and 
effort began. The want must remain ungratified or a means of 
gratifying it less painful than the want itself must be devised. This 



24 THE ORIGIN OF EQUITY, 

could only be accomplished by inventing labor-saving con- 
trivances ; and invention is exclusively the function of the mind. 
The greater the demand for this mental activity the more rapidly 
are the intellectual faculties developed, and the more easily are 
wants gratified. It was precisely upon this principle that the 
crude tomahawk, bow and arrow, and canoe were first employed, 
and the division of labor became a necessity. With the division 
and specialization of labor, exchange of products became indis- 
pensable to the gratification of wants, and some degree of inter- 
course having been established, a beginning of confidence became 
inevitable. As the wants of men increased, and they became 
more dependent upon each other for the means of satisfying 
them, they naturally became more settled and social in their 
mode of life, and as soon as the crudest form of association be- 
came necessary, altruistic conduct began. The fact that asso- 
ciation arose from self-interest made it indispensable that the 
advantages should be mutual to some extent. Thus from purely 
egoistic motives it became absolutely necessary that the efforts 
to benefit self should be so directed as to confer some benefit 
upon others. 

Through this closer social contact wants became still more 
varied and efforts more specialized ; intellectual activity in- 
creased and individuality grew more pronounced. When, from 
these influences, exclusive family relations, with the permanent 
care of offspring, developed, and the private ownership of prop- 
erty became customary, it was obvious that one of two things 
must occur, — either the security of life and property must be 
increased, or these complex social relations must be abandoned ; 
otherwise the danger to life and property would neutralize all the 
new advantages. Thus a certain degree of morality became in- 
dispensable to self-interest, and the murder, theft, and treachery 
which a more simple life induced, having proved injurious to all 
and permanently beneficial to none, were pronounced capital 
offences. The more closely we consider history in this light, the 
more clearly it appears that the same principle applies to the 
whole moral code. Just as fast as the quality of an action 
becomes uniformly recognized it is designated moral or immoral, 
and passes from the sphere of conscious expediency to that of 
moral principle. 



DEVELOPMENT OF MORALITY, 25 

In this way virtue tends to perpetuate itself, while vice or 
immorality tends to its own elimination. The object of intel- 
lectual activity being to serve the desire for happiness, it is neces- 
sarily employed in devising means for eliminating the painful 
without reducing the pleasurable experiences, and it is only as 
this eliminating process takes place that new social integrations 
become permanent and the best results of progress are secured. 
This principle applies to all phases of human conduct. All the 
improvements in medicines, ethics, politics, and et^nomics are the 
direct results of this eliminating process. 

It may be urged that the altruism, or morality, thus evolved 
from egoistic motives, is only of the unconscious kind, and is very 
different from the conscious altruistic feeling which we recognize 
in the highest moral characters. If we pursue the enquiry a little 
further we shall see that volitional altruism is but a higher phase 
of the unconscious expedient. The same principle which leads 
men to repeat the conduct that produces beneficial results, also 
leads them to have a common interest in, admiration for, and 
sympathy with, those identified with such beneficial efforts. 

It should be remembered, however, that social progress is not 
a simple, direct movement, but a resultant of the action and 
reaction of a variety of social currents, and that with each suc- 
cessive increase in the social complexity the influences affecting 
their differentiation become more subtle and involved. 

The increasingly frequent personal intercourse which inevitably 
arises from more complex social relations, and the greater identity 
of interests, naturally tends to promote a greater reciprocation of 
sympathetic feelings. It is a universal principle in sociology that 
the more frequently we repeat acts which command our own and 
others' approval, the more they tend to become habitual and 
automatic ; and in proportion as any conduct tends to become an 
unconscious part of daily life, it forms a fixed element of social 
character. Accordingly, in the most advanced countries, where 
the wants and desires of the people are the most numerous and 
their industrial and social relations the most complex, we find the 
greatest degree of honor, virtue, integrity, fair dealing, general 
honesty, and public and private justice ; in short, the highest 
phase of moral conduct. To such an extent is this true that con- 
tracts, sometimes covering millions of dollars, are daily made 



26 NEW WANTS THE CAUSE OF PROGRESS. 

between parties in New York, London, Paris, etc., who never saw 
each other. Should either party violate such obligation, the 
law — which expresses the moral character in the respective 
countries — would enforce its fulfilment, and the civilized world 
even sanctions warfare when nations violate their treaties with 
each other. 

The transfer of conduct from a basis of conscious utility to that 
of moral principle is but another step in social evolution ; the 
essential differ^ce being direct and indirect experience. 
When we act upon the abstract principle of right and wrong 
we are simply basing our conduct upon generalizations drawn 
from the repeated experiences of others. We accept it as a 
dogmatic principle only because its expediency has been pre- 
viously demonstrated. 

Nor is this all. The influences which are thus elevating indi- 
vidual egoism into moral principle are also simultaneously tending 
to expand and intensify sympathetic, altruistic feeling. In pro- 
portion as the influence of man's egoism becomes indirect, and 
that of his altruism direct, he becomes more sensitive to the 
feelings of others and less absorbed in his own ; so that, instead 
of regarding the misery of others with indifference, as formerly, 
a comparatively slight unhappiness becomes the source of great 
pain to him, and often the incentive to his highest action. Hence 
we see that, whereas man could once kill and feed upon his 
fellows, to-day the advanced races regard injury to another as 
equal to harm inflicted upon themselves. 

Viewing the subject in all its phases, we see that in every 
direction the increase of egoistic wants is the real source of social 
progress. It develops the activity of the intellect ; this in turn 
differentiates the social environment ; engrafts virtue into char- 
acter ; transforms conscious egoism and unconscious altruism 
into unconscious egoism and conscious altruism ; elevates utility 
into morality, and makes moral principle, instead of individual 
interest, the basis of social conduct. Thus, as man's intellect is 
called into activity by the differentiation of his desires, so is his 
moral character developed by the differentiation of his interests. 



CHAPTER IV. 

THE VERIFICATION OF THE LAW OF SOCIAL 
PROGRESS. 

According to the theory of social progress presented in the 
preceding chapters the development of man's social wants, and 
the consequent increase in the general consumption of wealth, is 
the necessary precursor of social, intellectual, and moral advance- 
ment. If this doctrine is correct we may always expect to find 
the highest state of civilization, and the most complete social, 
political, and religious freedom, in those countries where the 
material well-being of the masses is the most marked and con- 
tinuous. And conversely, wherever the development of social 
wants have been the most restricted, we may equally expect to 
find the greatest intellectual and moral stagnation, and social, 
political, and religious despotism. 

The operation of this law is as universal as the human race. 
History is replete with the evidence that social, political, and re- 
ligious freedom is everywhere large or limited, the intellectual 
and moral character high or low, in proportion as the general 
consumption of wealth by the masses is great or small. The his- 
tory of India and China, for instance, reveals to us peoples whose 
simple habits of life induce very few wants, and those chiefly of a 
physical character which are easily supplied. Their food consists 
chiefly of rice, ragi, or millet, with a little seasoning. Their 
houses are mainly fragile huts which may keep out the rays of 
the sun, but seldom afford much protection against wind and 
rain. The furniture and clothing of the common people are 
equally simple and meagre, being confined to the limited uses 
which a rice-diet and a ten-cent-a-day social life make necessary. 

27 



28 INDIA, CHINA, AND EGYPT, 

Although the political institutions of the two countries are in 
many respects essentially different, the economic and social con- 
ditions of the people are practically the same; What law and 
caste has done towards stereotyping the industrial and social 
degradation of the laboring classes in Hindostan, custom has just 
as firmly established in China. The natural result of these con- 
ditions is the arrest of material and social progress in those 
countries. If we can accept the testimony of modern travellers, 
the people of India and China are in substantially the same state 
of mental and moral degradation that they were in nearly three 
thousand years ago.* 

In Egypt the industrial and social systems were very similar 
to those in India and China, and their influence upon civilization 
was substantially the same. Dates composed the staple food of 
the common people. The poverty of the masses in ancient Egypt 
may be inferred from the fact that the children of the lower 
classes went entirely naked, and that to bring up a child to 
maturity did not cost more than twenty drachmas, or thirteen 
shillings of English money,* />., about three dollars and a quarter. 
The social and political servitude of the lower classes is shown 
by the fact that they were prohibited by law and custom from 
owning land, participating in public affairs, or even choosing their 
own occupation.' 

So far as data are obtainable, a similar set of facts present 

^ ' ' The nations of Europe have very little idea of the actual condition of the 
inhabitants of Hindostan. They are more wretchedly poor than v/e have any 
notion of." — "Transactions of Asiatic Society," vol. i., p. 482. "From the 
earliest period to which our knowledge of India extends, an immense majority 
of the people, pinched by the most galling poverty, . . . crouching before 
their superiors in abject submission, and only fit either to be made slaves them- 
selves or to be led to battle to make slaves of others." — Buckle's *' History of 
Civilization," vol. i., p. 53. " It is remarkable how little the people of Asiatic 
countries have to do in the revolution of their governments. They are never 
guided by any great and common impulse of feeling, and take no part in events 
the most interesting and important to their country and their own posterity." 
— " Journal of Asiatic Society," vol. i., p. 250. See also Alison's " History of 
Europe," vol. x., pp. 419, 420. 

* Buckle's " History of Civilization," vol. i,, p. 63. 

' " If any artisan meddled with political affairs, or engaged in any other em- 
ployment than the one in which he had been brought up, a severe punishment 
was inflicted upon him." — Wilkinson's " Ancient Egyptians," vol. ii., pp. 8, 9. 



GREECE AND ROME. 29 

themselves in the much-lauded early civilization of South Ameri- 
ca. The leading features of the industrial and social system in 
ancient Mexico and Peru were similar to those of China, India, 
and Egypt ; and consequently their influences upon human 
progress were substantially the same. What rice was to the in- 
habitants of India and China, and dates to those of Egypt, 
maize and bananas were to the people of Mexico and Peru. 
Here too, poverty, ignorance, and servitude, with all their 
attendant evils, were the direful lot of the laboring classes.^ 

The history of ancient Rome and Greece presents a similar 
picture, although the setting is somewhat different. These two 
countries differed from each other in some respects ; their cli- 
mate, religion, political institutions and literature were unlike 
those of India, China, Egypt, and early America in many im- 
portant particulars ; but in one fundamental respect they were 
all substantially the same — namely, the material and social con- 
dition of the people. 

The great mass of the people in Greece and Rome were miser- 
ably poor and the very few were enormously rich. Despite the 
progress of art, philosophy, and jurisprudence, the social con- 
tempt in which the industrial classes were held by their superiors 
was as intense as that exhibited by the ruling classes of Asia, 
Africa, and America. 

Slavery was so thoroughly rooted in the social system of 
Greece that it was not only sustained by those who had a mer- 
cenary interest in the traffic, but the philosophers — before whose 
wisdom we of the nineteenth century are asked to bow — defended 
it as being in accordance with natural law. Xenophon, a disciple 
of Socrates, in expressing his contempt for the laboring classes, 
declared : " The manual arts are infamous and unworthy of a 
citizen." Even Plato introduced slaves into his ideal republic. 
Nor did the scientific mind of Aristotle emancipate hirn from the 
iniquitous idea. Speaking of laborers, he says : " These indi- 

^ " They (the masses) had nothing that deserved to be called property. They 
could follow no craft, could arrange no labor, no amusement, but such as was 
specially provided by law. They could not change their residence or dress 
without a license from the government. They could not even exercise the free- 
dom which is conceded to the most abject in other countries — that of selecting 
their own wives." — Prescott's "History of Peru," vol. i., p. 159. See also 
Draper's " Intellectual Development of Europe," p. 461. 



30 EXTENT OF SLAVERY UNDER ROME. 

viduals are destined by nature to slavery because there is nothing 
better for them to obey. It is clear, then, that some men are free 
by nature and others are slaves ; and in the case of the latter, the 
lot of slavery is both advantageous and just." 

The inability of the learned and high-minded philosophers of 
Greece, who were too pure to participate in politics or trade, to 
conceive of the possibility of a social state without slavery attests 
conclusively how permanently and universally the social degrada- 
tion of the common people must have been established. 

Under Rome we find the same arrogant contempt for industry 
among the rich, and the same general ignorance among the 
masses. According to Gibbon, " slaves were so numerous in 
Rome that the authorities dared not permit them to wear a pecul- 
iar habit for fear that they might become dangerous by discover- 
ing their own numbers and strength." Athenasus boldly asserts 
that he knew very many Romans who possessed, not for use but 
ostentation, ten and even twenty thousand slaves.^ 

We are told that '' in Italy itself the consumption of life was so 
great that there was no possibility of the slaves by birth meeting 
the requirement, and supply of others by war became necessary." ^ 

It will thus be seen that the chief social characteristic of ancient 
civilizations was the opulence, arrogance, and despotism of rulers, 
and general poverty, ignorance, and servitude among the masses. 
Consequently all the forces that naturally tend to promote civili- 
zation were limited to a small exclusive class, while those influ- 
ences which tend to retard progress were in constant and general 
operation among the great mass of the people. Although wealth, 
learning, and culture are the most powerful agents in promoting 
human progress, it should always be remembered that the potency 
of their influence depends entirely upon the extent and constancy 
of their operation. It is not surprising therefore that the learning 
and philosophy of Greece and Rome, like the wealth of Asia and 
Africa, tended to increase the power of the rulers rather than to 
develop the social character of the common people. 

It is true that modern civilization owes more to the learning and 
philosophy of Athens, and the jurisprudence of Rome, than it 

^ Gibbon's " Decline and Fall of the Roman Empire," vol. i., p. 52 ; note, 59 ; 
ibid,, vol. i., p. 51. 

* Draper's " Intellectual Development of Europe," p. 184. 



) 



EFFECT OF ANCIENT PHILOSOPHY. 3 1 

does to the wealth and art of India and Egypt ; but this is not 
due so much to the superior influence which they exercised in 
their own time as to the fact that Greek philosophy and Roman 
law were committed to parchment, and thereby preserved until a 
sufficiently large portion of the race reached the advancement 
necessary to appropriate it. And long it had to wait for that period 
to arrive ; it was seventeen centuries after the time of Socrates, 
Plato, and Aristotle that Greek literature began to exercise any 
influence upon human progress ; indeed, it was not until a thous- 
and years after the government of Greece and Rome had passed 
away, and the slavery they had bequeathed to the race over- 
thrown, that — through the influence developed by the Free Cities 
of Europe — the laboring classes for the first time became active 
social factors, and a broader field prepared in which the seed 
of Athenian philosophy could germinate/ 

Therefore, so far as advancing the civilization — improving the 
social condition of the masses — of its own period is concerned, 
the philosophy of Greece and Rome did no more than the pyra- 
mids of Egypt, or the palaces of Peru. 

It was because the refining elements of these civilizations were 
not rooted in the industrial and social character of the common 
people, but represented only the glitter of a small class sustained 
by the power of the army, that their decay and fall was inevitable. 
When circumstances arose which forced them to contend with 
foreign enemies and civil strife, their seeming strength vanished 
and their real weakness was revealed. The defeat of the army 
was the fall of their power ; with the military support taken 
from under the government nothing remained to prevent it from 

^ Draper thinks the revival of Greek may be dated from the close of the four- 
teenth century, at which time Chrysoloras taught it in Italy. Although this iso- 
lated spark appeared in 1395, and some Greek manuscripts (including those of 
Plato and Pindar) were brought into Italy a few years later, it cannot be said that 
there was any perceptible restoration of, and much less any social influence from, 
Greek literature until after the capture of Constantinople by the Turks in 1453. 
This, it will be remembered, was fully a century and a half after the Free Cities 
had obtained the material prosperity and political freedom which made them 
leading factors in the social and industrial life of Europe ; more than a century 
after the discovery of gunpowder ; nineteen years after the insurrection of Wat 
Tyler in England ; thirty-seven years after the revolt of the Hussites in Bohemia ; 
and eight years after the discovery of the art of printing. 



32 WHY ROME FELL. 

falling to the level of the real character of the people — which was 
barbarism. 

It was a mistake to assume, as Draper and others have done, 
that the decay of these civilizations was the natural result of social 
ripeness and old age. Such was far from being the case ; they all 
died (socially speaking) in their very babyhood. Not one of 
them arose above the plane of chattel slavery and hand labor ; 
they did not even reach the point of having chimneys, or glass 
windows, in the houses of their most favored classes,^ — and cer- 
tainly much intellectual and moral light cannot be expected to 
enter the minds and characters of a people when sunlight never 
enter their dwellings. 

The commonly accepted notion that th& overthrow of these 
ancient governments was the destruction of superior civilizations 
is erroneous. When Rome conquered Greece and subjugated -all 
Europe, as well as Egypt and Asia Minor, — or when the barbari- 
ans sacked Rome, — they did not destroy high civilizations, but 
rather reduced the political institutions of the time to the level of 
the general industrial and social character they had create'd. Had 
the material conditions and social character of the Roman people 
in the fifth century been equal to that of the burgesses of the four- 
teenth, neither the defeat of the army nor the fall of the empire 
could have reduced them to barbarism ; but slaves — the chief 
social product of Rome — were good material for barbarian rule. 
Human progress was not arrested because Rome fell, but Rome 
fell because human progress had been arrested. 

* Chimneys and glass windows did not come into use until the middle of the 
fourteenth century. 



CHAPTER V. 

THE RISE AND SOCIAL POWER OF THE FREE 
CITIES. 

If we pass from the ancient to the modern world we shall find 
that, so far as the same causes have been in operation, the same 
social effects have been produced ; namely, that intellectual and 
moral development, and civil and religious liberty, have always 
followed the line of the material prosperity of the masses, and 
vice versa. 

The first five centuries of the history of Europe after the fall 
of the Western Empire compose the midnight darkness of social 
chaos. Indeed, the only approach to orderly government within 
that period was during the reign of Charlemagne. After his death 
the empire soon resolved itself into the elements from which it 
was constructed, and all law, authority, and regulai; government 
again disappeared. 

After protracted but futile struggles for political and territorial 
supremacy, powerful chiefs began to settle upon their domains 
with their retainers, and there assumed all the functions of 
military chiefs, civil magistrates, and political sovereigns over 
their vassals. Thus, before the close of the ninth century, the 
feudal system — which during the tenth, eleventh, and twelfth 
centuries governed all Europe — slowly emerged from barbarism. 

Feudalism sustained the same relation to barbarism that bar- 
barism did to Romanism. — not that it was superior to it, but that 
it was the natural outcome of it. Both barbarism and feudalism 
were simply the means of adapting the external machinery of 
society to the internal character of the people. As the vast em- 
pire of Rome became reduced to wandering tribes and petty 
3 33 



34 FIRST STEP TOWARDS FREEDOM. 

kingdoms because it had failed to develop the industrial and 
social character of the masses, so, for the same reason, in the 
tenth century authority was transferred from petty kings to feudal 
lords ; society was reduced to its lowest terms, and political rights 
and social privileges were absorbed by industrial conditions, — , 
he who offered the means of a living commanding complete 
political, military, and social allegiance. j 

Under this regime all who were not noble were servile ; the * 
extent of servitude was in accordance with the degree of poverty; 
the very poor were slaves. " Artisans and free husbandmen," says 
Hallam, "were often compelled to exchange their liberty for bread. 
In seasons also of famine, and they were not infrequent, many 
freemen sold themselves into slavery . . . others became 
slaves, as the more fortunate men became vassals, to a powerful 
lord for the sake of his protection." ^ 

Guizot observed : " No sooner was society a little settled under 
the feudal system than the proprietors of fiefs began to feel new 
wants, and to acquire a certain degree of taste for improvement 
and melioration ; this gave rise to some little commerce and 
industry in the towns of their domains ; wealth and population 
increased within them — slowly for certain, but still they in- 
creased."^ 

With the concentration of the serfs in the towns the seed of 
social development was planted. The influence of the in- 
dustrial, social, and religious intercourse thus created, though 
meagre and crude, perceptibly affected the wants and character 
of the laborers and taught them to produce, and also to consume, 
wealth. 

This first real step towards progress and freedom became too 
pronounced to be mistaken by the middle of the eleventh cen- 
tury, and finally grew too powerful to be arrested until it had 
overthrown the feudal system and laid the foundation of a higher 
civilization. As the towns increased more rapidly in population 
and prosperity, they naturally developed a spirit of independence. 
This tended to excite the jealousy of the barons, who regarded 
the burghers as serfs having no rights that they were bound to 
respect, and they therefore increased their exactions and en- 

' *' Middle Ages," vol. i., pp. 121, 122. 

* *' History of Civilization," p. 157 ; also ihid.^ p. loi. 



LETTING THE TOWNS IN FEE-FARM, 35 

deavored to rob and plunder them at every opportunity.' " The 
exactions," says Guizot, "of the proprietors of fiefs upon the 
burgesses were redoubled at the end of the tenth century. When- 
ever the lord of the domain by which the city was girt felt a de- 
sire to increase his wealth he gratified his avarice at the expense 
of the citizens . . . merchants on returning from their trading 
rounds could not with safety return to the city. Every avenue 
was taken possession of by the lord of the domain and his . 
vassals." Man will seldom take much risk to obtain advantages f 
he has never possessed, but he will risk every thing, often against \, 
great odds, to defend and sustain those he has already enjoyed, j 
So the burghers, having had a taste of wealth and social freedom, 
slight indeed though it was, were ready to risk their all to retain 
these benefits. 

Despite the constant efforts of the lords to check the power and 
progress of the burghers by greater exactions and open rob- 
bery, we are told that : " The towns became continually richer 
. . . the consciousness that they could not be individually 
despoiled of their possessions, like the villains of the country 
around, inspired an industry and perseverance which all the 
rapacity of the Norman kings and barons was unable to 
overcome." ' 

The opposition of the burghers to the harassing policy of the 
barons at length became so strong that the barons were com- 
pelled to abandon the effort to exact tribute from each individual 
burgher at will, and agreed to accept a specific amount from the 
whole town, to be paid as a yearly rent. To secure this rent the 
baron surrendered every other claim which he might have, either 
upon the town or its individual inhabitants. '' The town was 
then said to be affirmed, or let in fee-farm, to the burgesses and 
their successors forever." ^ This rent, when once fixed, was per- 
petual, and could not be increased by the lord, — however popu- 
lous or rich the town might become, — nor could any new tax be 
imposed upon it without the consent of the burghers. This was 
really the first victory for liberty ever known by, and for, the 
laboring classes. 

' " History of Civilization," p. 158 ; Hallam's " Middle Ages," vol. i., pp. 
365, 366, and Wade's " History of the Working Classes," p. 9. 

'^ Hallam's " Middle Ages," vol. ii., p. 78. 

2 Hallam's " Middle Ages," vol. i,, p. 78. 



36 REVOLT OF THE TOWNS, 

But, instead of being the end, this was only the beginning of 
the struggle, for what the lords could no longer take by tallage 
they endeavored to obtain by force/ In order, therefore, to 
maintain their existence and the little freedom they had ac- 
quired, the towns were forced into open hostility to the barons. 
To sustain themselves in this struggle we are told that : " Every 
citizen was bound by oath to stand by the common cause against 
all aggressors, and this obligation was abundantly fulfilled. In 
order to swell their numbers, it became the practice to admit all 
who came to reside within their walls to the rights of burgher- 
ship, even though they were villains, appurtenant to the soil of a 
master, from whom they had escaped." "^ Thus the towns not 
only protected the prosperity and promoted the progress of 
those who lived within them, but they offered protection and 
freedom to all who would flee from the clutches of the feudal 
masters. Guizot assures us that : " It was not merely the lower 
orders, such as serfs, villains, and so on, that sought this protec- 
tion, but frequently men of considerable rank and wealth, who 
might chance to be proscribed. . . . Refugees of this sort," 
he adds, ''had, in my opinion, a considerable influence upon the 
progress of the cities ; they introduced into them, besides their 
wealth, elements of a population superior to the great mass of 
the inhabitants." ^ 

By these means, together with the industrial and social in- 
fluences before referred to, the towns continued to grow in 
wealth, population, and power, and before the close of the 
eleventh century they were in general rebellion against the 
barons." Although the revolt was local, and spontaneous in 
its origin, it was universal and simultaneous in its movement. 
The same general causes were everywhere in operation, and 
consequently the same general effect was produced.^ 

^ " Wealth of Nations," Book III., chap, iii., p. 306. 

* Hallam's "Middle Ages," vol. i., p. 170. 

^ " History of Civilization," p. 157. 

^ Guizot's " History of Civilization," p. 161. 

® " The situation of all the towns being nearly the same, they were all liable 
to the same danger ; a prey to the same disaster. Having acquired similar 
means of resistance and defence, they made use of those means at nearly the 
same time." — Guizot's " History of Civilization," p. 161. 



ESTABLISHMENT OF FREE CITIES. 37 

When the open rupture between the towns and their lords took 
place, the king, though not necessarily an active partisan, was 
always a deeply interested party. Adam Smith says : " The 
burghers naturally hated and feared the lords ; the king hated 
and feared them too ; but, though perhaps he might despise, he 
had no reason to either hate or fear, the burghers. Mutual inter- 
est, therefore, disposed them to support the king, and the king to 
support them against the lords. They were the enemies of his 
enemies, and it was his interest to render them as secure and in- 
dependent of those enemies as he could " ' ; accordingly, in their 
struggles with the barons, the tovms frequently called upon the 
king for aid and support in protecting the rights and privileges 
which the lords had previously sworn to grant them. 

This appeal was generally responded to, at least so far as the 
king could know that his own power and interest would be pro- 
moted thereby. By this means, in the eleventh century, the towns 
began to obtain charters giving them special commercial privi- 
leges,"'^ and early in the twelfth century they obtained charters 
which secured to them, besides commercial privileges, the right 
of self-government.^ By these charters the towns were practically 
transformed into little republics. They were better able than 
ever before to effectually offer an asylum to overpowered lords, 
and freedom to the enslaved and degraded serfs v/ho might take 
refuge within their walls. These Free Cities, therefore, natu- 

^ "Wealth of Nations," Book III., pp. 306, 307. 

^ "From the time of William Rufus " (1087 to iioo), says Hallam, "there 
was no reign in which charters, were not granted to different towns, of exemp- 
tions from tolls on rivers and at markets, those lighter manacles of feudal 
tyranny ; or of commercial franchises ; or of immunity from the ordinary juris- 
diction ; or, lastly, of internal self-regulation." — " Middle Ages," vol. ii., p. 78. 

^ According to Hallam, the city of Leon received its municipal charter from 
Alfonso v., of Spain, as early as 1020. The city of London, from Henry I., 
in iioi, and those of Noyon, St. Quenton, Laon, and Amiens, by Louis VI., of 
France, about mo. "The privileges conferred by these charters," says this 
writer, ' ' were surprisingly extensive. . . . They (the burgesses) were 
made capable of possessing common property, and authorized to use a common 
seal as the symbol of their incorporation." — " Middle Ages," vol. i., pp. 166- 
169. "It is certain," says the same writer (vol. i., p. 190), " that before the 
death of Henry V., in 1125, almost all the cities of Lombardy, and many of 
those of Tuscany, v\^ere accustomed to elect their own magistrates, and to act as 
independent communities in waging war and in domestic government." 



38 SOCIAL POWER OF THE FREE CITIES. 

rally attracted to themselves the most industrious and energetic 
portion of the population, and consequently, during the twelfth 
and thirteenth centuries, became the centres of wealth, population, 
and progress. 

In 1 164, the Lombard cities formed a league to defend their 
rights and liberties against the attacks of Frederic Barbarossa, who 
two years before, attacked and pillaged the city of Milan, the most 
populous and powerful of their number. The war into which they 
entered lasted thirteen years, and ended with the famous " Peace 
of Constance " (1183), which, we are told, " established the Lom- 
bard republics in real independence."^ By 1188 the cities of 
Spain acquired the right of representation in the national legisla- 
ture. In 1 2 14 Magna Charta declared the old and new privileges 
of English cities to be inviolable (this was reconfirmed thirty-two 
times before the middle of the next century), and in 1265 the 
burghers, or inhabitants of the free cities, obtained representation 
in Parliament. 

About the middle of the thirteenth century, the Free Cities of 
Germany, in order to protect their rights and property against 
the rapacity of the barons, formed the famous Hanseatic League 
(which was a confederacy of eighty of the most powerful cities), 
and sixty other cities banded themselves together as the League 
of the Rhine. ' 

It will thus be observed that, through their material or indus- 
trial prosperity, social intercourse, and political activity, the Free 
Cities gave birth to human freedom and became the nurseries of 
modern progress ^ ; and that in those countries where the Free 
Cities never existed, such as China, Hindostan, and Egypt, civili- 
zation has been most stationary. 

^ Hallam's " Middle Ages," vol. i., p. 196. 

^ Ibid., p. 367 ; cf, ibid., vol. ii., p. 271. 

2 ' ' Order and good government, and along with them the liberty and security of 
individuals, were, in this manner, established in cities, at a time when the occu- 
piers of land in the country were exposed to every sort of violence." — Smith's 
** Wealth of Nations," Book III., chapter iii., p. 308. 



CHAPTER VI. 

THE FALL OF THE FREE CITIES AND ITS EFFECT 
UPON SOCIAL PROGRESS. 

It is not necessary to our present purpose to discuss the causes 
which led to the fall of the Free Cities, but merely to indicate, by 
a brief notice, the general relation which they sustain to social 
progress. The important fact everywhere observable is, that 
although the fall of the Free Cities in different countries was not 
simultaneous, nor the causes identical, the bad effect upon the 
material prosperity of the people and the progress of social, 
political, and religious freedom was substantially the same. 

In Spain charters were granted to the towns early in the 
eleventh century (1020),^ and before the close of the twelfth they 
were admitted to representation in the Cortes. The peculiar 
feature of the history of Spain during the Middle Ages is the 
fact that for nearly eight centuries she was engaged in religious 
war. The early charters of Spain, unlike those of France, Eng- 
land, and Germany, were granted more for the purpose of 
inducing the burghers to defend the country against the Moors, 
than to enable them to protect themselves against the exactions 
of the barons.^ This perpetual religious war served to keep the 
importance of the clergy and the king constantly before the 

' " The earliest instance of the erection of a community is (in Spain) in 1020, 
when Alfonso V., in the cortes at Leon, established the privileges of that city, 
with a regular code of laws by which its magistrates should be governed." 
— Hallam's " Middle Ages," vol. i., p. 303. 

^ " Instead of purchasing their immunities, and almost their personal freedom, 
at the hands of a master, the burgesses of Castilian towns were invested with 
civil rights and extensive property on the more liberal condition of protecting 
their country." — Hallam's " Middle Ages," vol. i., p. 303. 

39 



40 THE SPANISH CITIES. 

people, the former to teach the true faith, the latter to extirpate the 
heretics. The Christians being more devoted to the killing of 
heretics than to the production of wealth, manufacturing and 
commercial industries were, for the most part, carried on by the 
Mohammedans/ Therefore, when the Moors were driven out of 
Spain, and their industrial centres deserted, the last prop to her 
material prosperity was destroyed. Buckle pointedly observes ^ : 
" There was no one to fill their place ; arts and manufactures 
either degenerated or were entirely lost." 

The city of Seville, which before the expulsion of the Moham- 
medans contained sixteen thousand looms and gave employment 
to thirty out of fifty persons, only employed three hundred looms 
after that event. During the same period the fifty woollen- 
factories of Toledo were reduced to thirteen, and her silk trade, 
which had given employment to over thirty-eight thousand 
persons, was entirely destroyed. 

The poverty and wretchedness which followed this decay of 
the Christian and the violent overthrow of the Moorish Cities of 
Spain are almost indescribable,^ and with this industrial degener- 
acy the social progress of the burghers was soon arrested. 

By the close of the fifteenth century their representation in the 
Cortes, and with it their industrial and social freedom, was prac- 
tically extinct." From this time Spain rapidly declined, and soon 
fell from the position of one of the strongest to that of one of 
the weakest nations in Europe — a fall she has never since re- 
covered. 

In Italy the Free Cities fell from a different set of causes, but 
the effect of their fall upon progress was essentially the same in 
kind, if not in degree. As already stated, the Lombard Cities 
began to acquire wealth and freedom in the eleventh century, 
and before the close of the twelfth they became recognized, 
independent republics. Upon the same principle that the in- 
crease of wealth which precedes the development of wants leads 

^ Buckle's " History of Civilization," vol. ii., p. 52. '^ Ibid. 

^ Mahon's " Spain under Charles II.," pp. 138-140. 

* " At the cortes of Burgos, in 1315, we find one hundred and ninety-two 
representatives from more than ninety towns. ... by the year 1480 only 
seventeen cities retained the privilege of representation." — Hallam's " History 
of the Middle Ages," vol. i., p. 314. 



THE ITALIAN CITIES. 4I 

to waste, the increase of freedom and power that precede the 
development of social character necessary to their wise use, nat- 
urally lead to maladministration, and tend to promote anarchy 
rather than the advancement of a higher civilization. 

Thus it was with the Free Cities of Italy. They acquired 
political power too suddenly ; their form of government was 
republican before their character had become democratic. In 
short, their external power and prominence were more the result 
of political despotism than social development. Accordingly 
after their great victory over Barbarossa in 1183, they soon be- 
came the victims of internal feuds. Having no foreign enemy to 
encounter, they turned their swords upon one another, which was 
more fatal to their prosperity, power, and freedom than all the 
attacks of a foreign foe.^ Weakened by the factious war among 
themselves, they soon became an easy prey to monarchy. By the 
middle of the thirteenth century (1233) they had fallen into the 
hands of a monkish usurper, Vicenza, and by the close of the 
century they were forced, with little difficulty, to submit to the 
yoke of a despotic monarchy. So completely did the loss of 
their freedom follow that of their material prosperity that, "be- 
fore the middle of the fourteenth century, at the latest, all those 
cities which had spurned at the faintest mark of submission to 
the emperors, lost even the recollections of self-goverment, and 
were bequeathed, like undoubted patrimony, among the children 
of their new lords." 

Although brought about by very different causes, the fall of 
the free cities in Italy, as in Spain, arrested the material prosperity 
of that country, and consequently its social progress and political 
and religious freedom were greatly retarded. 

The history of the Free Cities of Germany was somewhat dif- 
ferent from that of Spain and Italy. In Germany the rapacity of 
the barons and petty princes partook more of the character of 
common highwaymen than in any other country. So universally 
was this the case among the rural nobles that it became customary 
for them to build their castles upon inaccessible hills where they 
could command the public highways. As an evidence of the 
prevalence of this practice, Hallam relates the story, told by a 

^ " For revenge, she threw away the pearl of great price, and sacrificed even 
the recollections of liberty." — Hallam's " Middle Ages," vol. i., p. 198. 



42 THE GERMAN CITIES, 

contemporary writer, of an archbishop who built a fortress of 
this kind. No legal provision having been made for him, he was 
asked by the governor ''how he was to maintain himself," to 
which he replied that " his castle was situated near the junction 
of four roads." 

As a means of protection against the " robber barons," the 
cities allied themselves with the emperors, and the emperors, in 
order to obtain assistance against the petty princes, willingly 
patronized the cities. German cities were not entirely free from 
the internal jealousies which were so fatal to those of Italy, but 
the constant danger from the barons made some degree of united 
action necessary to their existence. Thus the Hanseatic 
Union and the League of the Rhine were formed ; the first 
about 1250, and the latter in 1255. These two organizations 
comprised, at the time, over a hundred and thirty cities leagued 
together to defend themselves against the nobility, just as those 
of Italy were leagued against Frederick I. By this means the 
German cities escaped the fate of those in Lombardy ; but in 
their very escape they became the victims of influences which 
were scarcely less fatal in their results, though more gradual in 
their operation. Through their almost constant alliance with 
the emperor they naturally became more and more under his 
influence and control ; and although they did not become imperial 
strongholds, they ceased to be democratic nurseries. Guizot 
has well observed : '' They preserved their privileges, but they 
remained confined to the inside of their walls. Within these, 
democratic organization was shut up and arrested ; if we walk 
abroad over the face of the country, we find no resemblance of 
it." ^ Thus, while they retained their external form until afte-r the 
close of the sixteenth century, at the close of the fifteenth their 
power as harbingers of industrial and political freedom was 
practically destroyed. 

If we turn to France, a similar picture presents itself ; although 
the local causes were different, the general result was substantially 
the same. France was the birthplace of feudalism, and it is 
therefore not surprising that the feudal system should have taken 
deeper root in that country than in any other. While it was a 
fundamental principle of feudalism that the lord should be 

' " History of Civilization," p. 223. 



THE FRENCH CITIES. 43 

supreme on his own domain, in no country was baronial sover- 
eignty so absolute, in theory and practice, as in France. There 
the lord possessed all the powers that were invested in the king. 
He even had the right to declare war against the king himself. In 
many countries this practice was more or less indulged in, but in 
France it was laid down as one of the legal rights of the lord. By 
this means the feudal nobility in France were equal in strength to 
all other elements combined. Although the French kings, in 
order to strengthen their own hands, granted very liberal charters, 
they were mainly confined to the towns on the royal domains 
and those of the weaker nobility in the south of France. Con- 
sequently, when the struggle between the barons and the cities 
came, the power of the former proved too much for the latter, 
and the cities fell.^ 

With the fall of the Free Cities the feudal system was re- 
established, and many of its odious features continued down to 
the French Revolution. 

Passing from the Continent to England, we shall find that, while 
the general appearance of the movement was very similar, the 
essential features, and therefore their effect upon civilization, were 
very different. The Free Cities in England, like those on the Conti- 
nent, were the birthplaces of material prosperity and the nurseries 
of civilization ; but in England no elements were strong enough 
to suppress them. Neither the king nor the Church, as in Spain ; 
nor internal strife and usurpation, as in Italy ; nor baronial 
weakness and imperial strength, as in Germany ; nor the feeble- 
ness of royalty and the power of Feudalism, as in France, were 
sufficient to prevail against the cities of England. 

From the fifth to the eleventh century there was very little dif- 
ference in the social state of the various countries in Europe ; if 
any thing, England was probably less advanced than some of the 
rest. About the middle of the eleventh century, however, an 
event occurred in England which produced an arbitrary and 
radical change. When William, Duke of Normandy, decided to 
present a forceful claim to the English throne, he promised to 

^ " And so it was in France. The towns, with few exceptions, fell at the first 
shock ; and the cities lost their municipal privileges, which, not being grafted 
on the national character, it was found impossible to preserve." — Buckle's 
" History of Civilization," vol. i., p. 449. 



44 THE ENGLISH CITIES. 

freely distribute the wealth and land of England among his fol- 
lowers in order to induce them to enter more heartily into the 
struggle, and he v/as as good as his word. 

He had no sooner obtained possession of the British Govern- 
ment, such as it was, than he proceeded to dispossess the Britons 
of all political power and to confiscate their property, — both of 
which he divided among his Norman followers/ In this redis- 
tribution of wealth and power, William never lost sight of the 
main object of the conquest, — his own power and aggrandize- 
ment, — and hence, in making his grants, he was always careful to 
exact the fullest ackowledgment of his own supreme authority. 

The feudal system in England was thus arbitrarily recon- 
structed, and, so far as the nobles were concerned, on a more 
limited basis than that which obtained upon the Continent. For 
instance, the most powerful of the English barons never acquired 
such sovereign privileges as the right of coining money in their 
own name ; the right to forbid the circulation of the royal money 
upon their own domains ; exemption from all public tribute ex- 
cept feudal aids ; the right of waging private wars, even against 
the king, etc.^ The power of the Norman barons in England 
being thus limited, the contest for supremacy between feudalism 
and monarchy was more evenly balanced. Under these condi- 
tions the opportunity for the growth and safety of the towns was 
naturally great. Consequently, we find that, while the English 
towns did not rise to opulence as suddenly as the Italian cities, 
they made gradual progress toward wealth, power, and freedom. 

In order to weaken the barons, and in the hope of strengthen- 
ing his own hand, the king granted charters to the towns, ex- 
empting them from, and protecting them against, the exactions of 
the barons. Another beneficial effect of "that vigorous pre- 
rogative of the Norman monarchs which kept down the feudal 
aristocracy" was, that, because of the inability of the barons to 

^ " This exclusion of the English from political privileges," says Hallam," was 
accomplished with such a confiscation of property as never perhaps has 
proceeded from any government not avowedly founding its title upon the sword. 
In twenty years from the accession of William almost the whole soil of England 
had been divided among foreigners." — " Middle Ages," vol. ii., p. 27. 

^ See Hallam's " Middle Ages," vol. i., p. 127 ; also Buckle's " History of 
Civilization," vol. i., p. 445. 



THE MAGNA CHART A. 45 

cope single-handed against the king, it became necessary for 
them to include the rights and privileges of the burghers (whom 
they hated) with their own. 

It was by this means that, under the leadership of Stephen 
Laughton and the Earl of Pembroke, the Magna Charta was 
wrung from that rapacious and treacherous coward. King John, 
in 1 2 15. This declared that : '' The charter of the city of Lon- 
don, and of all the towns and boroughs, is inviolable ; no freeman 
shall be taken or imprisoned, or be deprived of his freehold liber- 
ties ; or free customs ; or be outlawed ; or exiled ; or any other- 
wise destroyed but by lawful judgment of his peers, or by the 
law of the land." The great charter of rights extended as much 
protection to the burghers against the violence and oppression of 
the barons as it did to the barons against the oppressions of the 
king, and in order to secure the privileges thus obtained subse- 
quent kings were forced to solemnly ratify this great charter ^ 
thirty-two different times. In the same way, fifty years later, the 
burghers obtained the right of popular representation in Parlia- 
ment. It was in the protracted struggle between the confederate 
barons and Henry III. that, in order to secure the favor of the 
burghers and thereby strengthen the hands of the barons against 
the king, the Earl of Leicester, on the 12th of December, 1264, 
issued writs to all the sheriffs, directing them to return to parlia- 
ment '' two citizens for every city and borough, in addition to 
the knights of the county."' Nearly all the charters that were 
granted to the towns after the reign of John gave them complete 
municipal independence, including the right to make their own 
laws, elect their own magistrates and judges, levy their own 
taxes, etc. 

With these powers the Free Towns could offer protection and 
citizenship to all who would reside within their walls. Villeins 
were declared free, and endowed with the free rights of citizen- 
ship, who fled to the chartered towns and continued residents for 
a year and a day.^ This obviously tended to increase the power 

^ See Buckle's " History of Civilization," vol. i., pp. 446, 447 ; also Hal- 
lam's " History of the Middle Ages," vol. ii., pp. 73, 83. 
' Hallam's " Middle Ages," vol. ii,, p. 7;5- 
2 Ibid., p. 203. See also Wade's " History of England," p. 9. 



46 RISE OF THE WAGE SYSTEM, 

of the towns and the number of freemen, and at the same time 
to diminish the power of the Lords, as is abundantly shown by 
the petitions sent to Parliament by the lords, praying : " that 
the villeins might not put their children to school . . . for the 
honor of all freemen in the kingdom " ; and complaining : "that 
villeins fly to cities and boroughs, whence their masters cannot 
recover them ; and, if they attempt it, are hindered by the peo- 
ple ; and prayed that the lords might seize their villeins in such 
places without regard to the franchises hereof." ' The result 
was that the lords were compelled to be more generous in their 
treatment of villeins in order to prevent them from running away 
to the towns,'* and consequently, by the last quarter of the thir- 
teenth century their condition had become greatly modified. 
Instead of being inseparable parts of the lord's estate, the villeins 
were now bound only to perform certain specified services, known 
as " labor rents," for which they were allowed to possess the land 
they lived upon, or work for wages the remainder of the 
time as " free laborers for another lord." ^ By the close of the 
reign of Edward II. (1327) labor rents had almost entirely dis- 
appeared * ; and before the middle of the reign of Edward III. 
the villeins, for the most part, had become wage-laborers," and 
feudalism, as an industrial system, was practically overthrown. 
The effect of these influences upon the industrial condition of 
the masses is further seen in the fact that, early in the fourteenth 
century, not only artisans but farm laborers began to demand 
higher wages. Rogers informs us that, at the close of the famine 
in 132 1, wages rose "from 23 to 30 per cent., fully 20 per cent, 
of which became permanent," ^ and thirty years later (1350) they 
rose again from 50 to 100 per cent.'' This marked increase in 

* See Eden's " State of the Poor," vol. i., pp. 3, 4 ; also Hallam's " Middle 
Ages," vol. ii., p. 207. 

^ " It was natural that the country people, or uplandish folk, as they were 
called, should repine at the exclusion from that enjoyment of competence and 
security for the fruits of their labor, which the inhabitants of the towns so fully 
possessed." — Hallam's " Middle Ages," vol. ii,, pp. 204, 205. 

2 Hallam's " Middle Ages," vol. ii., p. 202. 

* Rogers' " Six Centuries of Work and Wages in England," p. 218. 

* Hallam's " Middle Ages," vol. ii., p. 204. 

^ " Six Centuries of Work and Wages," pp. 2i8, 237. 
' Ibid., p. 237. 



FALL OF FEUDALISM. 47 

wages was not the result of temporary causes, such as famine, 
black death, etc., but the natural effect of the period in which 
English commerce and manufacture took their first great start/ 
It was in 1431 that Edward III., the ''father of English com- 
merce," induced Flemish manufacturers to settle in England, 
promising them that " they should feed on fat beef and mutton 
till nothing but fullness should stint their stomachs." 

The increasing wealth and comfort of the laboring classes 
during this period is further shown by the constant complaints of 
contemporary writers about " the extravagance and vanity of 
the common people," and the frequent petitions to Parliament 
complaining that " the masters were obliged to give their servants 
and laborers great wages to prevent their running away to towns 
where they became artificers, clerks, etc., to the great detriment 
of agriculture." Thus the natural prosperity which had its rise 
in the towns during the twelfth and thirteenth centuries extended, 
in the fourteenth, to the farm laborers in the rural country and 
consummated the fall of feudalism. 

Thus the towns in England gradually rose from industrial to 
commercial, and from commercial to political, importance. As 
their wealth did not precede their wants, each addition to their 
privileges was an increase of their power, and their influence 
upon freedom and progress extended beyond their own walls. 
Consequently, although their struggles were severe, they survived 
until they had overthrown feudalism, transferred the slavery of 
villeinage into wage-labor, securely established popular repre- 
sentation, and laid the foundation for the religious reformation 
in the sixteenth, the political revolution in the seventeenth, and 
the industrial revolution in the eighteenth and nineteenth cen- 
turies. 

It is a great mistake to conclude, as Fiske ' and other eminent 
writers appear to have done, that this is due to some inherent supe- 
riority in the English race. A careful consideration of the funda- 
mental causes which underlie and promote social development will 
show that, while the political and religious institutions of a country 
are determined by the character of its people, the character is main- 
ly determined by the industrial and social environment. Therefore, 

^ Cf. "Wealth and Progress," pp. 110-131. 
* "American Political Ideas," chap. iii. 



48 mSE OF THE MIDDLE CLASS, 

the cause of the superiority of the English over the Spanish, 
Italian, and German institutions in the seventeenth, eighteenth, 
and nineteenth centuries is not to be found in any inherent 
quality in the English race, but in the difference of its industrial 
and social conditions in the thirteenth, fourteenth, and fifteenth 
centuries. Manufacture and trade became more profitable than 
agriculture, and therefore naturally attracted to themselves the 
more intelligent and ambitious. By this means, during the fifteenth 
and sixteenth centuries there arose a middle or commercial class, 
whose increase in wealth and influence was such that early in the 
seventeenth century it began to rival the landed aristocracy.' 
Before the close of the seventeenth century the aggregate income 
of the manufacturers and merchants was more than equal to that 
of the nobility, and by the end of the eighteenth century the mid- 
dle class had become the dominant power in society. 

^ " In the course of the sixteenth century the commercial prosperity of Eng- 
land had increased with amazing rapidity, while during the same time much 
territorial wealth, much baronial property, had changed hands," — Guizot's 
" History of Civilization," p. 271, 



CHAPTER VII. 

THE PROGRESS OF POLITICAL AND RELIGIOUS 
FREEDOM. 

If we examine the progress of political and religious freedom 
we shall find that it has always followed the line of the material 
prosperity of the masses, rising where that rose, falling where it 
fell, and becoming permanent only where industrial improvement 
had been general and continuous. England was the only country 
in which the Free Towns were not overpowered by either the 
Church, the Monarchy, or the Barons, and consequently it was the 
only country in which social and political progress was not 
arrested. 

The Cortes of Spain, the States-General of France, and the 
Republics of Italy rose and passed away, scarcely leaving their 
imprint upon the national character, while the English House of 
Commons has ever stood out as a conspicuous feature of modern 
civilization. '* No great measure," says Guizot,' " which has 
truly had any influence upon society in France, no important 
reform either in the general "legislation or administration, ever 
emanated from the States-General. . . . The Cortes of Portu- 
gal and Spain afford the same general result. . . . The Cortes, 
like the States-General of France, has been an accident in his- 
tory, and never a system — never a political organization or regu- 
lar means of government. . . . The lot of England has been 
different. . . . The Commons obtained in England a power 
much superior to those on the continent, a power really capable 
of influencing the government of the country. In the fourteenth 
century, the character of the English parliament was already 

^ " History of Civilization," pp. 225-7. 
4 49 



50 WICLIFF, TYLER, AND HUSS, 

formed. . . . The attempt to bring together the various elej 
ments of society, and to form them into one body politic, one tru( 
state or common v/ealth, did szicceed in England while it failed ih^ 
every part of the Continent." 

What was true of municipal privileges and political representa- 
tion was equally true of religious liberty. In the fourteentl 
century, when, on the Continent, the masses were losing theil 
political rights and society was gravitating towards civil and re- 
ligious despotism, the people of England were steadily advancing; 
towards still more freedom. 

The increasing prosperity of the towns from the reign of Henry 
III. to the middle of the reign of Edward III. — during which 
time villeinage had been transferred into wage-labor, and the last 
thirty years (1321-1351) of which had witnessed a general and^ 
permanent rise of wages — greatly developed the social and intel- 
lectual character of the people,^ and made the successful advent 
of Wicliff and Wat Tyler possible. Whatever may have been ] 
the influences that induced Wicliff to openly renounce the 
authority of the pope, denounce the usurpations of the Roman 
Church, stigmatize the friars as its political and financial emis- 
saries, and insist upon the right of the laity to read and interpret 
the Bible — which he subsequently translated into English, — the 
effect of his teachings upon the community ultimately depended 
upon the character 'of the people.' Had Wicliff lived before, 
instead of after, the Free Cities, his own fate, as well as the 
influence of his doctrine, would probably have been entirely 
different. 

This is well illustrated by the fate of the Hussites in Bohemia 
some forty years later. When John Huss, through the treachery 

^ " A silent alteration had been wrought in the condition and character of the 
lower classes during the reign of Edward III. This was the effect of increased 
knowledge and refinement, which had been making a considerable progress for 
full half a century, though they did not readily permeate the cold region of 
poverty and ignorance." — Hallam's " Middle Ages," vol. ii., p. 204. 

5 As Buckle truly says : ' 'Although the origin of a new opinion may be due to 
a single man, the result which the new opinion produces will depend on the con- 
dition of the people among whom it is propagated. If a religion or a philosophy 
is too much in advance of a nation it can do no present service, but must bide 
its time until the minds of men are ripe for its reception." — " History of Civili- 
zation," vol. i., p, 186. 



FAILURE OF THE HUSSITES. 5 1 

(or weakness) of Emperor Sigismund, was sent to the stake 
(1416) for advocating the doctrines of Wicliff, his followers 
flew to arms under the leadership of one John Zisca, who, though 
totally blind, proved to be almost a second Hannibal, At the 
death of Zisca, however, the Hussites fell to pieces ; in less than 
twenty years after the death of Huss they were suppressed ; and 
by the middle of the century the movement was practically 
obliterated/ Thus the agitation of Huss in Bohemia only con- 
tinued during the life of its originators, and died without leaving 
any lasting impression on the character of the people, while that 
of Wicliff permeated the whole community to such an extent 
that, it was said, every third man v/as a Lollard. Wicliff's Bible 
created such a desire for reading, especially among the middle 
classes, that, by the middle of the fifteenth century, the art of 
printing — which had been waiting a thousand years for a book- 
reading civilization — became a success, and by its aid the 
country became ripe for the great ^religious reformation early in 
the sixteenth century. Nor can the difference in the fate of this 
movement in England and Bohemia be attributed to any differ- 
ence in the quality of the leaders or the tenets of the creeds. 
Both Wicliff and Huss represented leading universities, and both 
promulgated essentially the same doctrine. The only differences 
that existed were in the condition and character of the people. 

The same is true of the Wat Tyler insurrection in 138 1. Un- 
questionably the " groat-tax " ^ was the immediate cause of the 
discontent among the peasants, and the killing of the tax-collector 
by Tyler, for the assault upon his daughter, was the special fact 
which caused the uprising and put Wat Tyler at its head ; but 
the reforms that were demanded, and the permanent effect of the 
movement upon the community, depended upon the character of 
those who took part in it and were influenced by it. Despite the 
fact that Tyler was treacherously slain, the other leaders all sub- 

^ " I cannot assign any beneficial results to the schism of the Hussites, at 
least its immediate results, in the country where it appeared." — Hallam's 
" Middle Ages," vol. ii., p. 324. 

' A groat is fourpence (eight cents). The groat-tax was a tax of three groats 
a year levied upon every person in the kingdom, male and female, over fourteen 
years of age. It was the refusal of Tyler's daughter, under fourteen years of 
age, that led to the assault, for which Wat Tyler struck the collector dead at a 
blow. 



52 THE JACQUERIE AND PEASANT WAR, 

sequently hanged, and the declaration of the Lords and Commons. '\ 
in Parliament that they would never concede to the demand — \ 
"if it would save them from all perishing together in one day," — 
the insurgents finally obtained all that they claimed. The poll- 
tax was never collected, and, we are told, " the English laborer 
for a century or more became virtually free and constantly - 
prosperous." ^ 

If we compare the Insurrection in England with the Jacquerie 
in France, twenty-three years earlier (1358), or with the Peasant 
War in Germany, one hundred and forty-four years later {1525), 
the case is even more striking than that of Huss and Wicliff. In 
each of these countries the revolt was a spontaneous uprising of 
the people to demand a reform in their industrial and social con- 
ditions. There was one important difference, however : the 
Jacquerie and the Peasant War were preceded by a long period 
of the direst poverty and galling degradation, while the rising in 
England was preceded by more than a century of almost con- 
tinuous prosperity and growing freedom. Nothing is so effective 
in producing weak character as poverty ; and, for the same 
reason that empty stomachs make poor soldiers, empty characters 
make poor reformers. 

The Jacquerie and Peasant War were desperate outbursts 
of long pent-up degradation and despair. The struggles of the 
people were fierce, but their defeat was overwhelming, and they 
were hurled back into poverty and subjected to a despotism as 
oppressive as that against which they had rebelled. The English 
uprising, on the contrary, being the natural outcome of previous 
material progress, led on to still greater prosperity and a higher 
civilization, which laid the foundation for the success of the great 
event of the sixteenth century — the religious revolution known as 
the Reformation. 

The Reformation was really a social movement. It was the 
first struggle of the middle class for freedom — of which the new 
religious doctrines were more the consequence than the cause. 
Wicliff's first protest was not against the unsoundness of the spir- 
itual teachings of the Church, but against the social injustice of 
its temporal exactions, which were declared by Parliament to 
amount " to five times as much as the taxes levied by the king." ' 

^ Rogers' " Six Centuries of Work and Wages in England," p. 271. 
'Draper's '* Intellectual Development of Europe," pp. 397-434. 



SOCIAL ASPECT OF THE REFORMATION. 53 

When he denounced the friars as financial emissaries of the 
pope, and advocated the heavy taxation of the monasteries, 
telling the king that " to prohibit the transmission of English 
money into Roman coffers was not only justifiable but a public 
duty," he was simply holding up the hands of Edward and his 
Parliament against the outrageous demand of the pope for the 
arrears of tribute — promised in a moment of humiliation by the 
weak and cowardly King John. His subsequent revolt against 
the theological dogma of the Church was the natural sequence of 
this opposition to her temporal usurpations. 

Again, in the sixteenth century, Luther did not raise his first 
opposition against the doctrines of the Church, but against her 
unscrupulous methods of exhorting tribute from the people. His 
first public movement (15 17) was the posting upon the doors of 
the cathedral at Wittenberg of ninety-five objections to the prac- 
tice of selling indulgences. It was not until he had been repri- 
manded by the pope, and afterwards ordered to publicly retract 
his utterances against the traffic, and finally condemned as a 
heretic, that he challenged the religious doctrines of the Church. 
Finding himself in a deadly conflict with the papal authority on 
temporal matters, he became defiant on spiritual matters also, 
and in 1520 publicly committed the books of the canon law and 
the bull of excommunication to the flames. 

In England the Reformation came into active existence in a 
very similar way. By the first quarter of the sixteenth century 
the usurpation of temporal power and the extortion of money 
from the people by the clergy had become a public scandal. In 
1529 the House of Commons declared, in a formal petition to the 
king, " that the house of convocation made laws without the 
consent or knowledge of the people ; that such laws were never 
published in the English language, and that, nevertheless, men 
were daily punished under them without ever having had an 
opportunity to eschew the penalties ... that poor men were 
harassed without cause in the spiritual courts for the m.ere pur- 
pose of extortion, and exorbitant fees were exacted from them 
without cause ; and that bishops illegally imprisoned, sometimes 
for a year or more, persons in their jails without informing them 
of the cause of their imprisonment or the name of their accuser." 
In their defence against these charges the bishops declared : " that 
canon law was superior to the laws of the realm ; that the punish- 



54 THE SPREAD OF PROTESTANTISM. 

ment inflicted upon laymen had been for the health of their souls ; 
and that, generally, saints may claim powers to which common 
men are not entitled." 

The determination of the Commons to curtail the temporal 

power of the clergy at this period is shown by the number of 

laws that were passed for that purpose, among which was the 

" Clergy Discipline Act." Thus, when it became necessary for 

Henry VIII. to depose the pope in order to obtain Anne Boleyn, 

I and subsequently to dispossess the clergy of their wealth in order 

I to retain his newly acquired authority over the Church, he was, 

I for social reasons, readily sustained by the Commons and the 

i middle class in his confiscation policy. 

The Reformation was to the middle classes of the sixteenth 
century what the movements of Wicliff and Wat Tyler were to 
the peasantry of the fourteenth. It attained higher intellectual 
and moral results because it was based upon higher material and 
social conditions. Although Protestantism spread over nearly 
all Europe, it failed to produce any permanent effect in those 
countries where the Free Cities had been overthrown and the 
material progress of the masses had been arrested. Thus, in 
Spain and Italy, where the Free Cities had been most thoroughly 
suppressed, the influence of the Reformation was the most 
fleeting. In the former country it was entirely stamped out in 
ten years,^ and in the latter it was suppressed before it could 
take root among the people.^ Although its struggle for a foot- 
hold was longer and fiercer in France, its extinction was hardly 
less complete. In Germany, where the Free Cities continued to 
a much later date, its influence, though more general and lasting, 
did not become permanent. It was only in England and Switzer- 
land, where the Free Cities were never entirely conquered, that 
the Reformation became permanently established. 

If we pass from the sixteenth to the seventeenth century we 
shall find that the march of progress was in accordance with the 
same general principles. It was the same character, produced 
by the same general causes, that revolted against the usurpations 
and oppressions of the Church in 1529, and finally took off the 
head of Charles I. in 1649. In short, for the same reason that 

^Buckle's " History of Civilization," vol, ii., p. 19. 
^Guizot's " History of Civilization," p. 260. 



POLITICAL REVOLUTIONS. 55 

the Reformation in the sixteenth century succeeded in estab- 
lishing the right of private judgment in England — while it failed 
on the Continent — the political revolution in the seventeenth cen- 
tury established popular constitutional government* in the same 
country — while it utterly failed in France.' To use the eloquent 
language of Professor Fiske : " The close of the seventeenth cen- 
tury, which marks the culmination of the Asiaticizing tendency in 
Europe, saw despotism, both political and religious, firmly estab- 
lished in France and Spain and Italy and in half of Germany ; 
while the rest of Germany seemed to have exhausted itself in the 
attempt to throw off the incubus. But in England this same 
epoch saw freedom, both political and religious, established on so 
firm a foundation as never again to be shaken, never again with 
impunity to be threatened, so long as the language of Locke and 
Milton and Sydney shall remain a living speech on the lips of 
men." ' 

It is equally obvious, from the industrial history of the period, 
that when, from causes elsewhere explained,^ the material 
progress of the laboring classes was arrested in the middle of the 
fifteenth century, their march towards freedom was also arrested. 
It was only that small portion of laborers who passed into the 
ranks of the middle or capitalist class in the fifteenth, who went 
on to freedom in the sixteenth and seventeenth centuries. The 
history of the Poor-laws, the Act of Settlement, and the Allowance 
system, clearly show the condition of the masses had not been 
improved from the middle of the fifteenth to that of the eighteenth 
century, and also that their liberties were not enhanced by the 
Reformation, the Commonwealth, or the Revolution of 1688." It 

^ The difference in the condition and character of the English and French 
Revolutions is clearly presented by Buckle in " History of Civilization," vol. 
i., chapter x. ; and even Guizot, the French historian, in discussing the Eng- 
lish Revolution, exclaims : " How came it to pass that this struggle took place 
in England sooner than anywhere else ? How happened it that the revolution 
of a political character coincided here with those of a moral character sooner 
than they did on the Continent ?" — " History of Civilization," p. 270. 

^ "American Political Ideas," p. 119. 

2 See " Wealth and Progress," pp. 132-144. 

^ " The eager spirits who crowded the House of Commons, the mounted yeo- 
men who rode with Hampden, the men who fought and won Marston Moor, and 
Naseby, thought no more of the peasant and the workman, had no more care 



56 RISE OF THE FACTORY SYSTEM. 

was the commercial prosperity of England, during the first half 
of the eighteenth century, that made it possible to produce 
wealth cheaper by machinery than by hand labor. This led to 
the organization of the factory system, which, during the first 
quarter of the present century, entirely changed the economic 
condition of the English laborer, and has since revolutionized 
the industrial system of all Christendom. The factory system 
broke up the isolated and non-socializing system of domestic in- 
dustry, and it brought the laborers into closer and more frequent 
intercourse with one another, socially as well as industrially. 
The influence of this upon the wants and habits and consequently 
upon the material condition of the masses, is shown by the rise 
of wages during the first twenty years of the present century. 
During the next twenty years the improved condition of the 
masses was still more marked, for during that time there was a 
pronounced fall in prices as well as a distinct rise in money 
wages.* The influence of this material prosperity upon the 
political freedom of the laboring classes is manifest from the 
liberal legislation that has followed from 1825 to the present 
time. Previous to this time industrial legislation, from the 
" Statute of Laborers " (1350), was directed to keeping down 
wages and restricting the social opportunities of the masses. Now 
for the first time in history the power of government was directly 
exercised on the side of the laboring classes. In 181 9 the first 
law was enacted restricting the hours that women and children 

for bettering him, than the Irish patriots of 1782 cared for the kernes and 
cottiers on whose labor they lived. . . . The great Revolution which established 
the authority of Parliament, put an end to arbitrary power, and relieved the con- 
sciences of those who could not accord themselves to the worship of the Eng- 
lish Church, brought no liberty to the peasant and artisan. It stereotyped their 
servitude. . . . Laborers had ceased to be factors in political action, and 
were simply ignored for a century or more. . . . All this too was done when the 
patriots and placemen chattered about liberty and arbitrary administration, and 
fine ladies and gentlemen talked about the rights of man." — Thorold Rogers' 
" Six Centuries of Work and Wages," pp. 432-434. 

^ According to Thorold Rogers, wages from 1800 to 1820 were 55.25 pence 
per day, while from 1821 to 1840 they were 62.75, and during the former 
period a given quantity of seven of the chief necessaries of life cost 232.5 
shillings, while in the latter they only cost 146.35 shillings. — "Six Centuries 
of Work and Wages in England," p. 504. Cf. Tooke's " History of Prices," 
vol. i., pp. 329, 330. 



SOCIAL REFORMS, 57 

should be employed in factories. In 1824 the laws, which for 
nearly five centuries had made it a penal offence for workingmen 
to organize for the promotion of their own interest, were re- 
pealed ; as 'was also the Quarter-Sessions Assessment Act.' In 
1825, 1831, 1833, 1844, 1847, 1874, and 1882, important laws were 
enacted reducing the hours of labor, by instalments, from 
fourteen to nine and a half hours per day ; also providing com- 
pulsory education for all working children under fourteen years 
of age ; superior sanitary regulations for all factories and work- 
shops ; proper protection against dangerous machinery ; making 
the employer responsible for injury to laborers, etc. Through 
the constantly increasing influence of the growing intelligence 
and social character of the laboring classes upon public opinion, 
the right to vote was extended, in 1832, 1867, and 1884, from the 
middle to the laboring classes ; the last instalment making the 
agricultural laborer politically (at least on election day) the equal 
of the Duke of Westminster. It was during this period also that 
religious tests for holding government offices v/ere abolished ; 
that Catholics {1828) and Jews (1845) were admitted to repre- 
sentation in Parliainent and permitted to enter the universities ; 
that tithes were commuted and church rates were abolished ; that 
the great Chartist movement ^ was inaugurated ; that the con- 
spiracy laws were repealed ; that stamps on newspapers were 
abolished ; and a free press and free speech were established. 
Thus, in the same way and for the same reason that the civil 
and religious liberty acquired by the middle classes in the six- 

^ See Rogers* " Work and Wages," p. 438. 

' Macaulay clearly saw the historical error of ascribing our industrial and 
social progress to our political institutions, and says : "I am perfectly aware of 
the immense progress which your country has made and is making in population 
and wealth. I know that the laborer with you has large wages, abundant food, 
and the means of giving some education to his children. But I see no reason 
for attributing these things to the policy of Jefferson. . . . You will, I am 
sure, acknowledge that the progress which you are now making is only a con- 
tinuation of the progress which you have been making ever since the middle of 
the seventeenth century. It therefore seems to me quite clear that the facts 
which you cite to prove the excellence of purely democratic institutions, ought 
to be ascribed not to those institutions, but to causes which operated in America 
long before your Declaration of Independence. " — Macaulay 's letter on Randall's 
" Life of Jefferson," Oct. 9, 1858. 



58 INDUSTRIAL CONDITIONS OF AMERICA. 

teenth and seventeenth centuries was the fruition of the material 
progress of the fourteenth and fifteenth centuries, the social, 
religious, and political freedom obtained by the masses in the 
nineteenth century is the result of the material prosperity which 
made the use of steam, the spinning- jenny, the power-loom, and 
the factory system possible. 

If we pass from Europe to America we shall find that social 
progress has taken place in the order and in accordance with the 
same general principle as in England. The most superficial 
acquaintance with the history of the United States is sufficient to 
show that our republican institutions are the consequence, and 
not the cause, of our material prosperity. The Republic was 
born of the social and intellectual character growing out of a 
long period of previous industrial prosperity, and this prosperity 
was due to causes long ante-dating the slightest observable 
democratic tendency in our political institutions. 

The comparative prosperity which prevailed in the American 
Colonies for three quarters of a century immediately preceding 
the Revolution is shown by the fact that wages were most of the 
time one third higher, and the price of provisions very much lower, 
here than in England. In describing the industrial condition of 
the American people during that period, Adam Smith says : 
'' Labor is there so well rewarded, that a numerous family of 
children, instead of being a burden, is a source of opulence and 
prosperity to the parents. The labor of each child, before it can 
leave the house, is computed to be worth a hundred pounds clear 
gain to them." In 1770 the wages of carpenters, masons, etc., 
in London (which is always twenty-five to thirty per cent, higher 
than in the country), were two shillings and six pence a day,^ 
while at the same date in New York, ship carpenters received 
" six shillings and six pence sterling, and journeymen tailors two 
shillings and ten pence sterling " "^ ; and, adds the same writer, 
" the price of provisions is everywhere in North America much 
lower than in England." 

This industrial prosperity made the development of the social 
and intellectual character of the people inevitable. Consequently 

^ These prices were paid at Greenwich Hospital from 1830 to 1770, and are 
taken from the records of that institution. 

2 Smith's "Wealth of Nations," Book I., chapter viii., p. 54. 



FRENCH AND AMERICAN REVOLUTIONS. 59 

the necessary intelligence and force of character had been created 
to successfully resist the permanent adoption of the Stamp Act 
(1765), and it was repealed the next year. The opposition to 
this measure did not arise from the poverty or hardship it entailed 
upon the people, but from the injustice of the principle it involved. 
The same year in which the Stamp Act was repealed in England 
the " Declaratory Act " was adopted, insisting that the king and 
Parliament " had the absolute right to make laws binding the 
colonies and the American people in all things whatsoever." 
The endeavor to enforce this principle rekindled the flame of 
resistance in this country and gave rise to the effective cry that 
** taxation without representation is robbery." This led (1767) 
to the policy of excluding (boycotting) English goods, — which 
resulted (1770) in the throwing of tea into Boston Harbor, — and 
finally culminated (1776) in the Declaration of Independence, a 
successful revolution, and the establishment of the Republic. 
Thus, instead of the Revolution being a desperate struggle against 
industrial degradation, it was a bold, high-minded assertion of 
political principles, sustained by the superior character conse- 
quent upon the previous industrial prosperity. This explains 
the important difference between the character and result of the 
French and American Revolutions. 

For a century previous to their great Revolution the people of 
France were in a state of almost indescribable poverty and social 
degradation, and their struggle was for material existence only. 
The natural consequence was that they were much more barbar- 
ous in their methods and the effects were much less beneficial on 
this account. The American Revolution resulted in establishing 
the most liberal and democratic republic the world has ever seen, 
while that of France did little more than exchange one despot 
for another. Our Republic was not only born of industrial pros- 
perity, but its success and permanence are due to the same cause. 
The industrial prosperity of our people during the first seventeen 
or twenty years of the Republic was phenomenal. By the end of 
the first decade our exports had risen from nineteen to ninety- 
four millions of dollars and the revenue had increased from five 
to thirteen millions. Nor was this prosperity in any sense due 
to our republican institutions ; it was the result of causes which 
operated exclusively in Europe. During the first quarter of a 



6o GROWTH OF AMERICAN INDUSTRY. 

century after the outbreak of the French Revolution (1789 to 
1815) events in Europe almost uninterruptedly conspired to pro- 
mote the industrial prosperity of the young Republic. 

The French, English, Dutch, Spanish, and Portuguese merchant- 
men were practically driven from the seas by the campaigns of 
Napoleon. The United States was in an excellent condition to 
supply vessels to take their places and her neutrality secured her 
the opportunity. By this means the Republic obtained, for the 
time being, a practical monopoly of the ocean freight of the world. 
All that was necessary for the small capitalist of America to do, in 
order to rapidly acquire wealth, was to obtain a cargo of Ameri- 
can products at normal prices and sail to the West Indies, or to 
Europe, under the American flag. For several years Europe was 
supplied with American produce ; Russia, Sweden, Germany, and 
even England often availed themselves of the service of the 
American merchants for exchange and freight. The effect upon 
the trade and industry of the Republic may be seen from the fact 
that, in 1789 the aggregate capacity of American shipping was 
only 21,000 tons, while in 1808 it had increased to 110,000 tons. 

Another European influence which greatly contributed to the 
growth of American industry was the discovery of the spinning- 
jenny and the power-loom (i 767-1785), and the inauguration of 
the factory system in England, which created a great demand for 
American cotton. 

In 1 79 1, the entire cotton crop of America was only 2,000,000 
pounds, and by the close of the century the annual product was 
over 48,000,000 pounds. In 1795, ^^^ English consumption of 
American cotton was 5,000,000 pounds ; in 1820 it was 90,000,000 
pounds ; in 1840 it was 488,000,000 pounds ; and by i860 it was 
over 1,100,000,000 pounds a year. This prosperity was the one 
great fact which saved the Republic from going to pieces under 
the terrible strain to which it was subjected by foreign wars and 
internal dissensions during the first years of its history. 

Therefore, instead of attributing our remarkable industrial 
prosperity and superior civilization to our republican institutions, 
as is the custom of our statesmen, journalists, and public teachers 
generally, the truth is that our republican institutions are the 
natural result of industrial prosperity and consequent superior 
civilization. 



PART IL 
THE PRINCIPLES OF ECONOMIC PRODUCTION. 



CHAPTER I. 
WEALTH AND THE LAW OF ITS PRODUCTION. 
Section I. — The Nature and Meaning of Wealth, 

In considering the laws which govern the economic production 
of wealth, it will be necessary to explain : (i) wealth, (2) produc- 
tion, (3) the necessary factors in production, (4) the economic 
importance of these factors, (5) the principle upon which they 
become active in production. 

Unfortunately the term wealth has no uniformly accepted 
signification. There is no general agreement, even among the 
best writers, as to what the word wealth means. John Stuart 
Mill, after saying, " Every one has a notion sufficiently correct 
^or common purposes of what is meant by wealth," within his first 
two chapters gives several definitions of wealth, all of which are 
essentially different. For example, he says ^ : " Every thing 
forms therefore a part of wealth which has a power of purchas- 
ing " ; and adds ^ : "In the wealth of mankind nothing is included 
which does not of itself answer some purpose of utility or 
pleasure." But many things have " a power of purchasing" 
which in themselves " answer no purpose of utility or pleasure." 
A dollar bill, a bank check, a mortgage deed, a trade privilege, 
etc., in themselves " answer " no '^ purpose of utility or pleasure," 
but they constantly have a " power of purchasing." In fact, it is 
only because they can be exchanged for things that will in them* 
selves " answer some purpose of utility or pleasure " that any one 
cares to possess them. Again he says ^ : "It is essential to the 
idea of wealth to be susceptible of accumulation." Services are 

^ " Principles of Political Economy," vol. i., p. 24. 

' Ibid, pp. 24, 25. ^ Ibid., p. 75. 

63 



64 CONFUSING DEFINITIONS, 

obviously incapable of being accumulated. The products of 
labor may be stored up, but not so of labor itself. To-day's 
service, whether of the highest functionary or of the lowest 
laborer, must be used to-day or it is lost forever ; hence, accord- 
ing to this definition, labor cannot be wealth, — although it is 
about the only "power of purchasing" the masses possess. 
Again he says * : " The skill and the energy and perseverance of 
the artisans of a country are reckoned part of its wealth no less 
than their tools and machinery." And on the next page he 
throws this into confusion by saying ^ : " I shall therefore in this 
treatise, when speaking of wealth, understand by it only what is 
called material wealth." With such conflicting definitions as these 
from Mill, it can hardly be a matter of surprise that confusion 
should pervade the writings of less able thinkers and more 
careless writers. 

Walker says ^ : " Wealth comprises all articles of value and 
nothing else." If this definition is correct, then that of Mar- 
shall," which includes " human faculties, habits — physical, mental, 
and moral," as wealth, cannot be accepted, because the essential 
condition of value is exchange, which involves transferableness. 
Human faculties and habits are inseparable attributes of individ- 
ual character, and are absolutely non-transferable, and conse- 
quently cannot have value. We can influence others by our 
faculties and habits, but we can no more transfer them to another 
than we can give him the color of our hair. To treat human 
faculties as wealth is to confound wealth with man. Moral and 
mental qualities indicate rather what a man is than what he has. 
To thus confound wealth with man tends to increase the confu- 
sion, rather than to clarify the conception, of both wealth and its 
relation to man. 

Such is the confusion on this point that some writers have 
questioned the wisdom of using the term wealth. Perry actually 
proposes to expunge it from the economic vocabulary,^ and 
recommends as a substitute the word property ; but it is difficult 
to see in what sense this would be an improvement. It is as 
necessary to clearly define the meaning of the word property 

' " Principles of Political Economy," vol. i., p. 75. 

' Ibid., p. 76. ^ " Economics of Industry," p. 6. 

» " Political Economy," p. 5. " " Political Economy," p. 98. 



ATTRIBUTES OF WEALTH. 65 

as it is the term wealth, and all the difficulties Avhich beset the 
use of the former term would be associated with the latter. 
''That is property," says Perry,' "which can be bought and 
sold." But would it not be just as easy, simple, and correct to 
say — that is wealth which can be bought and sold ? Manifestly, 
nothing would be gained to the science by merely substituting the 
word property for wealth. 

Popular phrase is always the most direct avenue to the public 
mind, and hence should never be abandoned except a manifestly 
greater directness of expression and clearness of thought can be 
obtained by so doing. Common language has universally appro- 
priated the term wealth to convey the idea of something which 
gratifies human wants. Nor does there appear to be any 
scientific necessity for employing a new word to express that 
idea. All that is required for the purposes of correct reasoning 
and clear statement is, that the term shall be so defined as to ex- 
press all that is included in the idea, without embracing any thing 
inconsistent with it. 

If we examine the characteristic attributes of wealth, we shall 
find that such a definition is not only possible, but entirely feasi- 
ble. In the first place, wealth is essentially a social phenomenon ; 
nothing can be wealth which is not subject to, and conditioned 
by, social influences. In other words, wealth must be something 
peculiar to man as a social being, as well as a mere animal organ- 
ism. Therefore, whatever exists as the result of purely cosmic 
influences, whether chemical, mineral, vegetable, or animal, can- 
not be wealth until it comes within the pale of social influences. 
Second, in order to constitute an object wealth, it must possess 
the capacity of gratifying some human want or desire. In other 
words, it must possess utility. Third, it must be socially appro- 
priable ; that is to say, it must be capable of being adapted 
to the exigencies of social life, and hence must be transferable, — 
susceptible of exchange. Fourth, in order to possess these 
qualities, it must have an objective existence ; that is to say, 
it must be something external to man — a part of his environment. 

Therefore, for an object to be wealth it must be at once social, 
useful, transferable, and material. There are many things which 
possess some of these qualities, but lack others, and hence can- 

^" Political Economy," p. 99. 



66 HUMAN FACULTIES NOT WEALTH. 

not be classed as wealth. Thus, for example, the sun, air, gravi- 
tation, and other forces are useful and objective, but they are 
neither social nor transferable ; that is to say, they are the 
product of automatic cosmical, instead of social, forces, and 
hence are equally in the possession of all without effort. Thus 
they are not only independent of social influences, but they are 
unappropriable, and consequently incapable of exchange. 

Man's physical and mental faculties, and also his moral quali- 
ties, are highly useful to himself and to society : they are subject 
to, and regulated by, social influences, but they have no objective 
existence, and hence cannot be transferable. They may be 
higher and better than wealth, but they are not wealth, because 
they lack one of the essential attributes of wealth. In short, they 
are attributes of man's character and not the external objects with 
which he gratifies his wants and desires. 

While this view of wealth excludes the personal qualities which 
orthodox economists have included — without being able to give 
a sufficient reason for so doing — it includes other things which 
they excluded. They have made it " essential to the idea of 
wealth to be susceptible of accumulation." ^ Hence they have 
concluded that all the efforts of teachers, ministers, lecturers, 
singers, actors, showmen, etc., are non-productive ^ — because 
what they produce cannot be accumulated ; that is, it cannot be 
stored up and subsequently enjoyed or exchanged. This has 
led to that erroneous doctrine of unproductive labor which per- 
vades so much of English economic literature. It is not neces- 
sary to constitute an object wealth that it shall be able to main- 
tain all the attributes of wealth for an extended period. If an 
object has all the qualities and fills all the functions of wealth at 
any one time, it is wealth. An object is not precluded from being 
wealth to-day, because it fails to fill that function to-morrow, or 
next month, or next year. That is simply a question of degree 
of durability, and not a question as to wealth /(?r se. 

The product of the minister, the musician, the lecturer, the 
actor, etc., in the form of a sermon, song, lecture, or drama, fills 

^ Mill's " Principles of Political Economy," vol. i., chap. iii. 

"^ "Wealth of Nations," Book II., chap. iii. Mill's " Principles of Political 
Economy," vol. i., pp. 77, 78, Marshall's "Economics of Industry," pp. 18, 
19- 



1 



DEFINITION OF WEALTH. 67 

all the functions of wealth. It is social, because it is entirely the 
product of human influences. It is useful, because it gratifies 
human wants and desires. It is transferable, because it is capable 
of being distributed to an unlimited number of people. It is ob- 
jective, because it exists entirely in the environment of those who 
produce it and those who receive it. It is not capable of being 
redistributed, because it loses all its wealth attributes within a few 
seconds after its production. But, as before remarked, that is 
simply a question of duration. The susceptibility to re-distribu- 
tion is not a necessary quality of wealth, it is only a quality of 
some kinds of wealth. Therefore we may say that the product 
of this class is not only wealth, but much of it is vastly more so- 
cializing and civilizing in its influences than many forms of 
wealth which are susceptible of redistribution, long duration, and 
extensive accumulation. 

Wealth, then, must have an objective materiality and possess 
potential transferable utility — the actualization of which is de- 
pendent upon social or human forces ; or, to be more specific, 
the term wealth includes every thing capable of serving human 
wants and desires, the utility of which is the result of human 
effort. 

An able critic, to whom this chapter was submitted in manu- 
script asks : '' If a shower of manna fell from Heaven, or an 
island of coral rose from the sea, or a spring of healing mineral 
water started from the hill, or the sea washed up a mountain of 
pearls, would they not be wealth ? " Certainly not, they would 
possess some of the qualities of wealth, they would have objec- 
tive materiality and they would be appropriable, but they would 
possess only potential utility — to actualize which would require 
the human effort necessary to put them into the possession 
of those whose wants they would supply. Until utility is 
actualized, it is as though it did not exist. The vast coal- 
beds of China are not wealth to the Chinese, and the gold 
in California and the iron in Pennsylvania was not wealth 
to the roving Indians. Natural or cosmic forces alone can 
never produce wealth. The most they ever do is to make the 
production of wealth by man possible. Therefore, every thing 
may be regarded as wealthy the utility of which is actualized by 
human effort. 



6^ PRODUCTION AND PRODUCERS. 

Section 1 1. — Production and Producers — Their Economic 

Meaning. 

The terms production and producers have been scarcely more 
fortunate in their treatment at the hands of the economists than 
has weahh. While nearly all writers use them, they seem to take 
the liberty of expanding or contracting their signification at will. 
The French physiocrats limited the term production to efforts 
devoted to the cultivation of land — that is, extracting material 
commodities from the earth. All efforts devoted to manufacture, 
transportation, and commerce were regarded by them as unpro- 
ductive labor. 

Adam Smith vigorously attacked this idea as being too 
narrow. ^ With great force and clearness he showed that efforts 
devoted to manufacture, transportation, and all the various 
phases of trade and commerce are as truly productive as are 
those applied to agriculture ; but he insisted that armies, navies, 
courts, and government officials, together with all intellectual and 
literary efforts, were non-productive and a burden upon "the 
produce of other men's labor.'" 

Mill, who modernized Adam Smith, extends this definition 
sufficiently to make it include government officials in the pro- 
ductive class, on the ground that : " The labor of officers 
of government in affording the protection which, in some 
manner or other, is indispensable to the prosperity of industry, 
must be classed as productive even of* material wealth."^ Be- 
yond this, however, he adheres to the definition of Adam Smith, 
and classes all efforts as unproductive that do not produce 
wealth which can be literally accumulated and inventoried. 
"All labor," he says," "according to our present definition, must 
be classed as unproductive which terminates in a permanent 
benefit, however important, provided that an increase of material 
products form no part of that benefit. . . . Unproductive 
may be as useful as productive labor ; it may be more useful 
even in point of permanent advantage. ... In any case 
society or mankind grow no richer by it, but poorer." 

To say the least, this definition of production is very con- 
fusing. For while it recognizes the creation of utility as essential 

^ " Wealth of Nations," Book IV., ch. ix. ^ Ibid. Book II., ch. iii. 

^ Mill's " Principles of Political Economy," vol. i., p. 76. 
^ Ibid., pp. 77, 78. 



NON-PRODUCTIVE LABOR THEORY. 69 

to production, it declares a large class of efforts unproductive 
which produce the highest kind of utility. The efforts of minis- 
ters, lecturers, actors, musicians, and their class, not only create 
utility, but the kind of utility they produce serves a very high 
order of human desires ; indeed, they are the most effective of 
all kinds of effort in producing the new wants which form the 
very basis for the production of material things. If the efforts 
of government officials are productive because they tend to 
increase the security of property, and thereby indirectly aid 
in the gratification of human wants, surely the efforts of the 
intellectual classes, which directly serve a much higher class of 
wants, are still more entitled to that designation. 

Moreover, if the philosophers, scientists, and teachers were 
mere economic parasites on society, and did not increase enjoya- 
ble utility, the tendency of progress would be to eliminate them 
from social life. The fact is exactly the reverse. The more 
society becomes acquainted with the influences which promote 
the gratification of its desires, the more this class is increased. 
A definition according to which politicians, soldiers, policemen, 
and jailers are productive helpers to society, and scientists, 
philosophers, poets, teachers, ministers, actors, and musicians 
are unproductive burdens, should carry with it its own con- 
demnation. To assume that mere parasitic influences increase 
as the knowledge of the means of gratifying human desires 
becomes more perfect, is a violation of the fundamental idea 
of production, and contrary to the whole principle of self-interest 
underlying all economic movement. 

There are others who, while extending the definition of wealth 
to the products of those workers whose efforts do not increase 
the actual quantity of things, limit the term production to those 
efforts which are put forth for pay. Thus any effort is unpro- 
ductive, however much utility it may produce, if the product is 
not offered for sale. "^ producer,'' says Perry,^ " /j- any person 
who gets any thing ready to sell and sells it'' *' One of my boys," 
he adds,^ "is now playing the piano in the parlor. It is effort 
for him — irksome effort, but as he has no intention to ever sell 
his skill on that instrument it cannot be called productive effort. 
It is effort put forth for altogether other than commercial reasons, 

* ** Political Economy," p. 166. ' Ibid., p. 167. 



yo ALL USEFUL LABOR PRODUCTLVE, 

The effort of his music-teacher, however, who comes here to give 
him lessons, is productive effort, inasmuch as it is put forth solely 
with reference to a sale." 

According to this definition, whether a given class of effort is 
productive or unproductive does not depend upon whether it 
creates utility, but whether or not it is sold. Thus, if a person 
raises his own provisions, or makes his own clothes, he is not a 
producer ; and if an artist paints a picture, or a poet composes a 
song, or a musician plays Beethoven's Ninth Symphony for his 
own, or his friend's, instruction without pay, it would be unpro- 
ductive. But if they charged for it, then it would be productive. 

The estimation in which a doctrine should be held which 
teaches that those who supply their own wants, or gratuitously 
help to supply those of others, are non-producers, is obvious. 
The idea so prevalent in the public mind, and especially among 
the wage-workers, that middle-men are non-producers, and that 
interest, profits, and rent are robbery, is a legitimate part of the 
self-contradictory doctrine of non-productiye useful effort. 

If we accept the definition of wealth stated in the last section, 
we shall see that all efforts are properly productive which directly 
or indirectly tend to impart to matter any of the attributes, or 
surround it with any of the conditions, which make it available 
for human wants and desires. The desires which induce pay for 
* the services of the actor or musician, minister, lecturer, scientist 
or statesman, are as purely economic as those which make it 
profitable for the farmer to raise wheat and wool, or the miller 
and manufacturer to prepare them for final use. It is fallacious 
to the last degree to assume that, because the results of any 
intellectual effort cannot be measured by inches or pounds, they 
are unproductive. 

Much of the plausibility of this popular error arises from 
viewing the question in its most complex aspect, thus making the 
inter-relation of the various efforts more difficult to observe. If 
we examine the process of production in its simplest stages, we 
shall soon see that the doctrine of unproductive labor is an 
attempt to deal with an economic myth. 

For example, let us take the production of flour. In the 
simplest stages of society we find that man plants and harvests 
the wheat, grinds it into flour, and eats it all himself. When the 



DIFFEREh'TI AVION OF PRODUCTIVE EFFORT, 7 1 

process is complete the wheat has filled the function for which it 
was produced, it has gratified human want. In this case it was 
produced and consumed by the same person. Clearly, there were 
no parasites here ; all that was produced belonged to him who 
produced it. Every thing that was necessary to obtain the bread 
in this case was a part of its production. 

Let us suppose that man begins to produce flour for his neigh- 
bor, and the neighbor to produce shoes for him. By this slight 
degree of specialization of effort, the process becomes a little 
more involved. It is now necessary for him to take the flour to 
his neighbor, and for his neighbor to bring the shoes to him. 
This is clearly as much a part of the production as it was to take 
it from his own field to his hut. But suppose that another man 
will agree to devote his whole time to carrying the flour and allow 
the first man to devote his time exclusively to raising and grind- 
ing it ; the process will now become still more involved, while it 
will only cover the same article as before. If the new man 
receives a portion of the flour for his part of the process, will he 
be a parasite upon the man who raises and grinds it, or upon the 
distant consumer wlio receives it ? Certainly not ! The second 
man simply does a part of the work that the first man has 
proviously done, and by this division of labor they are able 
to produce more. If we follow the process a little further, we 
find the man who carries the flour devising means to transport it 
in large quantities — instead of taking it in small quantities to suit 
the individual consumer ; but in order to make the flour available 
to individual consumers, he has to divide it into small quantities 
to suit their convenience. At this juncture a fourth man enters, 
and volunteers to receive it in bulk, and to deliver it to the con- 
sumers in convenient quantities to suit their wants. Here the 
process becomes still more complex, but nothing is added. The 
fourth man requires a part of the flour for what he does, but this 
is not an added burden to the man who grows the wheat, or to 
those who use it, because the only reason he does what the other 
man formerly did is because he can do it cheaper than the other 
could. Indeed, the only reason any one is permitted to enter the 
process at any stage is because it is seen that, by this means, 
each can obtain more of the aggregate utility for less effort and 
sacrifice. 



72 CYCLE OF PRODUCTIVE EFFORT, 

If we follow the process until a million men are added, the 
same will be true in every stage. If, at any time, the added man 
results in lessening the relative utility which accrues to any of the 
existing producers, they will return to the previous method of 
production and do without him. Thus the wholesaler, the drum- 
mer, the retailer, the shipper, the banker, or broker, all fill a 
useful function in the process of producing the flour. Until they 
can do this no one will employ them ; and just as soon as they 
cease to do it every one is interested in eliminating them. 

Again, as the process increases in complexity, new elements 
arise. As wealth is produced on a larger scale it is necessarily 
held in large quantities at the factories, and at the various whole- 
sale and retail depots on its way to the consumer. With this 
increased accumulation of commodities the risks of loss, by fire 
and other causes, necessarily increase. Hence, in order to 
secure their safe delivery to the consumer (without which the 
whole process would be void), it is necessary to have policemen 
to guard them from thieves and incendiaries — another differentia- 
tion, which involves legislators, courts of justice, lawyers, etc. 
At last, in order to further protect the aggregate community 
against dangers of molestation by foreign countries, and for the 
protection of trade between countries (at least, until the moral 
quality of the race is more highly developed), an army and navy 
are necessary — the administration of which makes a general 
government indispensable. 

Thus we see that not only are ministers, singers, actors, etc., 
productive factors in the community, but the policemen, lawyers, 
doctors, judges, soldiers, sailors, and statesmen are also producers. 
In other words, every thing that promotes the raising of wheat in 
Dakota, or its safe delivery as flour into the pantry of the con- 
sumer, or in any way aids in compassing the satisfaction of any 
other human want — physical, mental, moral, political, esthetic, or 
religious, — is properly production. 

Section III. — The Necessary Factors in Production and 
Their Relative Economic Efficiency. 

The factors which participate in the production of wealth may 
be briefly stated as Land, Labor, and Natural Forces. By the 
first is meant the earth's surface ; the second, human energy ; 



FACTORS IN PRODUCTION, 73 

and the third, cosmic forces — including all natural agencies 
outside of man and land. Land may be regarded as representing 
passive material, and the other two as the active forces which 
operate upon it in producing wealth. 

Without the presence of all these factors wealth cannot be 
obtained. They are equally essential to the simplest and to the 
most complex methods of production. Land being the passive 
element, the only factors which actively participate in production 
are the human and the natural forces. It may be remarked, how- 
ever, that there are some natural forces — such as the light and 
heat of the sun, gravitation, atmospheric air, etc. — that are 
gratuitous, being ever present and ever active, even under 
the simplest conditions of land-labor. But there are certain 
other natural forces — such as steam, electricity, coal, wood, iron, 
etc. — which, as factors in production, are not gratuitous. For 
instance, steam can only be made to do service in production 
when it is confined in a boiler and applied to an engine ; and this 
makes the use of coal, iron, and other materials necessary. This, 
in turn, cannot be accomplished without a considerable amount 
of skill and energy having been previously devoted to the con- 
struction of engine, boilers, etc. The wealth thus employed is 
distinguished from that which is used for the direct gratification 
of human w^ants, and is called capital. 

This brings us to another economic term which has been sub- 
jected to a great variety of definitions. Capital is generally used 
to express the means employed in production, but because man's 
faculties are constantly employed in the production of wealth, 
some writers have included them in the term capital. Hence we 
frequently hear such expressions as : " The laborer's skill is his 
capital." ' It would be difficult to conceive of a more misleading 

* ' ' Capital may be said to be any thing which a man can trade with or which 
he can turn to the purposes of profit, or which helps him to gain an income — any 
property or quality he possesses which enables him to increase his wealth. 
Thus the tools of an artisan, together with his skill and industry, 
form his capital ; the education and books and skill of a physician and lawyer 
are their capital." — Macleod's" Elements of Political Economy," p. 70. " Per- 
sonal wealth consists of those human energies, faculties, and habits, physical, 
mental, and moral. . . . Almost all personal wealth is or may be per- 
sonal capital." — Marshall's "Economics of Industry," pp. 6 and 20. See also 
"Wealth of Nations," Book II., chap. i. 



74 NATURE OF CAPITAL. 

expression. Instead of giving any definite meaning to the term 
capital, it deprives it of all special significance and makes capital 
and labor synonymous, hence rendering the discussion of their 
relation logically impossible. 

It is equally misleading to speak of capital as " stored up labor " 
— a mode of speech commonly indulged in. Labor is human 
energy, and, as we have elsewhere shown/ can never be stored up 
in any thing but a human being, and only to a very limited extent 
there. It is because the laborer cannot store his labor — because 
he can never sell more than one day's service in a day ; and be- 
cause, if he does not sell to-day's labor to-day, it is lost forever, 
that enforced idleness has such terrors for him. Nor can he store 
up his labor in external objects. When he devotes his energies 
to producing an article he does not impart his labor to it, but he 
expends his labor upon it, and as human force it is gone forever. 
Wealth and capital in every form and under all conditions are 
something outside of and subservient to man, but can never be a 
part of him. 

There are two states in which wealth may exist : that of being 
produced, and that of being consumed. It can also fill two func-' 
tions : that of serving human wants, and that of aiding in produc-; 
tion. Hence wealth may be properly divided into two classes : 
consumable wealth, and productive wealth. It is the latter kind 
only which can properly be called capital. 

It is held by some that, as land is a means of producing wealth, 
it is capital.^ There is a certain amount of plausibility in this \ 
but it should be remembered that land does not necessarily pos- 
sess any of the qualities of either enjoyable or productive wealth. 
It is only when labor, or capital and labor, are devoted to it that 
it can either serve human wants or assist in producing consuma- 
ble commodities. It is true that, when land has by this means 
become wealth, it may also become the means of procuring mor^ 
wealth, and in that sense fill the function of capital. 

It may be asked, however, if all other wealth becomes capitz 

^ "Wealth and Progress," pp. 17, 18. 

'^ " By much the largest part of all salable land is nothing more nor less thai: 
capital. Capital is some product reserved as a means of further production ; anc 
valuable land is always a product of labor and previous capital and is general!) 
reserved for use in future production and so is capital under the definition." 
Perry's " Political Economy," p. 283. 



USE OF THE TERM CAPITAL. 75 

by virtue of aiding in production, why is not all productive land 
capital for the same reason ? Strictly speaking, so far as land di- 
rectly serves human wants, it is consumable wealth, and so far as 
it aids in production, it is instrumental wealth, or capital. By 
making this technical distinction and treating certain kinds of 
land as capital we should probably add to the confusion, rather 
than to the clearness, of economic discussion. 

Therefore, — while admitting that it might be technically correct 
to regard land, under certain conditions, as capital, and the re- 
turns from it as profits, — for the sake of avoiding any unnecessary 
confusion, I shall follow the example of Mill * and use the term 
capital as expressing all instrumental wealth, outside of land, the 
returns from which are interest and profit ; and all wealth invested 
in and inseparable from land will be regarded as land, and the 
returns from it as rent. 

There is an additional advantage in this use of the term capi- 
tal in the fact that it is the only wealth, distinct from land, that 
can be employed in harnessing the reluctant natural forces, such 
as steam, electricity, etc., to the production of wealth. With 
this use of the term capital, it will be strictly correct to treat the 
use of reluctant natural forces in production as synonymous with 
capital, because they never participate in production except by 
the use of capital. And, as the substitution of natural for human 
forces in the productive process is the essential wealth-cheapening 
feature in economic progress, we shall continue to regard the fac- 
tors in production as Land, Labor, and Natural Forces (capital). 

Which of these three factors then is the most effective in pro- 
ducing wealth ? — which of them is capable of contributing the 
greatest amount of productive force at the least cost ? The hand 
is the slowest, and, judged by its results, the most expensive 
instrument that can be used in the production of wealth. Hence 
we find that, other things being equal, machine-made products 
are always cheaper than hand-made products, and the difference 
in their cost is proportionate to the relative difference in which 
human and natural forces (capital) participated in their pro- 
duction. How, or upon what principle then, natural forces can 
be made to save human labor in producing the world's wealth is 
the question next to be considered. 

^ " Principles of Political Economy," vol. i., p. 526. 



j6 NA TURAL FORCES SA VE HUMAN LABOR. 

Section IV. — The Principles iipon Which Natural Forces 
Save Hitman Labor in Production. 

We have seen that human effort is devoted to production upon 
the principle of obtaining the maximum enjoyable result for the 
minimum painful effort. Indeed upon no other principle can the 
net amount of happiness — /. e., the proportion of pleasure to pain 
in human experience, be permanently increased. While most 
civilized people would prefer that the condition of the laborer 
should be easy and pleasant, and his wages high, very few are 
willing to give a fraction more for their commodities in order to 
make such things possible. 

That which undersells always supplants that which is under- 
sold, and just as fast as any product can be undersold will the 
methods used in its production be driven out of use. Conse- 
quently the only basis upon which natural forces can supersede 
human labor as factors in production is that they produce wealth 
more cheaply.^ In other words, the use of capital and improved 
methods in the production of wealth is ultimately determined by its 
capacity to yield increasing returns. This brings us to the question 
of what makes increasing returns possible. 

The fact that wealth can be produced more cheaply by natural 
forces than by hand labor is recognized by all classes of economic 
writers. But why the use of natural forces in production is 
feasible at one time and place and not at another — upon what 
principle hand labor as a productive force was cheaper than 
machinery in the ninth century, and machinery became cheaper 
than hand labor in the nineteenth century, and why machinery 
will yield increasing returns in America and Europe to-day, 

^ By cheapness and clearness is not meant merely the amount of money that is 
given for a commodity. An article may be and often is cheaper at one time and 
place at twenty cents than at five cents at another. Shoes, for example, would 
be very much dearer at fifty cents a pair in China than at a dollar a pair in Amer- 
ica. For the simple reason that in order to obtain a pair of shoes at fifty cents 
the laborer in China would have to give more than a whole week's labor, while 
the laborer in America would purchase a pair at a dollar with less than one day's 
work. That is to say, he could give twice as much money for the shoes and still 
obtain them for less than one sixth of the labor the Chinaman could. Thus a 
thing is really cheap or dear, not according as it will exchange for a large or small 
quantity of money, but solely according to the ratio in which it will directly and 
indirectly exchange for a given quantity of labor. 



MISTAKEN PRAISE OF PARSIMONY, J J 

while it fails to do so in Asia and Africa, the current doctrines 
of political economy fail to explain. Yet this is one of the- most 
important problems which it is the special function of economic 
science to solve. To make natural forces cheaper than human 
labor, as a means of production, is to make wealth cheaper than 
poverty, and civilization cheaper than barbarism. Therefore, to 
explain how increasing returns, and hence the successful use of 
machinery, can be made possible, is primarily to solve the prob- 
lem of economic production. Because reluctant, natural forces 
only aid in producing wealth when they are harnessed to the 
process by capital, it is assumed that capital is the cause of the 
successful use of improved methods of production. And because 
capital is wealth which might have been used for personal gratifi- 
cation, instead of being devoted to production, it is concluded 
that it is the result of painful abstinence. 

Adam Smith was never tired of singing the praises of parsi- 
mony. Indeed, with him, to save wealth was one of the highest 
virtues ; while to consume it, except in the meagerest manner, 
was a social vice. He even went so far as to declare' that 
prosperous manufacturing villages had become "idle and poor 
in consequence of a great lord's having taken up his residence in 
their neighborhood," because of his extravagant consumption. 
There is probably no one thing that the great Scotchman said 
which has been more generally accepted than that parsimonious 
abstinence increases prosperity, and liberal consumption leads to 
idleness and poverty. 

Mill emphasized and elaborated this idea even more than did 
Dr. Smith. He regarded capital as the alpha and omega of in- 
dustrial employment, and abstinence from consumption as the 
source of capital, and hence the initial cause of prosperity.^ This 
notion is still held by the most modern writers in England and 
this country. "■ Capital," says Prof. Walker, "arises solely out of 
saving. It stands for self-denial and abstinence." It is not 
difficult to see how this view, which makes capital the immediate, 

^ See " Wealth of Nations," Book II., ch. iii. 

' " While on the one hand industry is limited by capital " so " on the other hand 
every increase of capital gives or is capable of giving additional employment to 
industry, and this without assignable limit." — Mill's " Principles of Political 
Economy," vol. i., p. 98, 



78 NECESSITY OF INCREASING RETURNS, 

and sacrifice and self-denial the initial, cause of prosperity, has 
given rise to the idea that industrial progress is mainly due to the 
social martyrdom of the capitalist class, to whom the laborers are 
under eternal obligation. 

This is truly a most convenient and flattering estimate for the 
successful classes, especially when they are called upon to face 
the less fortunate masses in time of adversity. The natural out- 
come of this is the general disposition to repress, rather than to 
encourage, any movement towards multiplying the wants and de- 
sires, — hence, increasing the consumption of wealth among the 
mass of the people, and " living simply as our fathers did," is 
commonly held up as the evidence of superior character. ^ 

A doctrine which makes parsimonious simplicity of life a social 
virtue, and regards capital as the cause of industrial progress, is 
an economic inversion no less inimical to the development of the 
true principles of social economics than is the socialistic doctrine 
that regards the laborer as the sole producer of wealth and the 
capitalist as an economic robber. 

A very little examination of the subject will show that, while 
the use of capital is indispensable to, it is not the cause of, the 
employment of wealth-cheapening methods in production. On 
the contrary, capital in its very nature can never be any thing 
but an economic instrument, the successful use of which has 
been made possible by previously existing conditions. It is one 
of the characteristic features of economic production that the 
superiority of the natural over human forces consists in their 
capacity to produce a much larger quantity at the same cost, and 
not in their capacity to produce a small quantity at a less cost. 
Therefore, if only the traditional quantity of the produce can be 
utilized (consumed), the new method cannot be successfully em- 
ployed because it cannot produce that small quantity any cheaper 
than it can be obtained by existing methods ; and hence fails to 
yield increasing returns. The first condition, then, necessary to 
the successful use of natural forces is a sufficiently enlarged 
market to utilize the increased product resulting from the im- 
proved methods. 

No amount of increase in the use of capital, then, can cheapenj 
wealth and add to the well-being of the community unless it isj 
accompanied by a larger demand for commodities — an increase( 



NOT THE RESULT OF ABSTINENCE. 79 

consumption of wealth by the people. Thus, instead of parsi- 
mony, on the part of the great body of consumers, promoting the 
use of capital in production and the growth of industrial pros- 
perity in the community, it tends to prevent it. 

Nor is the claim that capital is created by self-sacrifice any 
more correct. It is true that capital consists of wealth which 
might have been consumed by its owner for personal gratification. 
Capital may be, and doubtless is sometimes, the result of painful 
abstinence, but the painful abstinence is always exercised upon 
the same principle, and from the same motive, that painful effort 
is exerted — namely, that a still more painful desire may be grati- 
fied ; in other words, that a greater amount of pleasurable grati- 
fication may ultimately be derived from the investment of wealth 
in productive enterprise than would be obtained from its imme- 
diate consumption. It is therefore no more correct to say that 
capital is the result of abstinence than it is to call labor philan- 
thropy. Abstinence — which represents painful self-denial — is 
undertaken for the identical reason that labor — painful effort — is 
expended. The object of both is to obtain more in gratification 
than they give in sacrifice. But even this only applies to capital 
in its most primitive stages. It is more than probable that not 
one per cent, of the world's present capital is the result of any 
such personal abstinence. 

While original investments are savings and perhaps the result of 
some self-denial, they are always undertaken in the belief that subse- 
quent capital will be the automatic product of the first, and will come 
without any personal self-denial. It is not true, then, in any real 
sense, to say that capital is created by self-sacrifice, as, even in 
its abstinence stage, it is simply the result of enduring a small 
amount of pain in order to obtain a large amount of pleasure, 
which is the purest self-interest and has no element of real sacri- 
fice in it. 

Moreover, as the capital-creating abstinence is always based 
upon the hope of future gains, it will only be undertaken in pro- 
portion to the probability of its successful investment ; and its 
successful investment in production depends upon the possibility 
of its yielding increasing returns ; this in turn depends upon the 
extent of the market, or the increased consuming capacity of the 

community. Thus it is that neither the creation nor the success- 
6 



So CAPITAL THE EFFECT OF PROGRESS. 

ful use of capital is promoted by parsimonious social simplicity, 
but, on the contrary, they both primarily depend upon advancing 
social complexity. Capital is the effect, rather than the cause, 
of social progress, and instead of the masses being indebted to 
the employing class for their prosperity, it is the social progress 
of the community which has made the existence and success of 
the capitalist possible. 

It is a universal fact in history that where the social life is the 
simplest, the wants the fewest, and the consumption of wealth per 
capita the smallest, the use of capital in production is the least. 

Thus the real reason why there are practically no capitalists 
among the Esquimaux and Patagonians — and very few in India 
and China — is because there is no economic use for them ; and 
there is no use for them because, as a factor in production, 
human labor is cheaper there than natural forces. The wants, 
social habits, and demands of the masses, are too simple in those 
countries to furnish a market for a sufficiently increased quantity 
of wealth to make increasing returns possible, and the use of 
capital profitable. 

Section V. — Social Consumption the Basis of Economic 

Production. 

We are now in a position to affirm the seemingly paradoxical 
propositions : that consumption is the immediate cause of, and 
regulating influence in, production ; that, not only the quantity 
and quality of wealth produced, but also the methods employed, 
the cost of its production, and consequently its price to the con- 
sumer, are finally determined by consumption ; and that wealth 
becomes cheap as man becomes dear. 

Nor is the reason difficult to understand, if we constantly view 
man and his wants as the source and end of economic move- 
ment. When we fully recognize that the progress of society 
consists in the differentiation of man's social relations, and that 
every differentiation in the social polity is simply an effort to 
better adapt his social environment to the more complete gratifi- 
cation of his wants, much of the difficulty surrounding the sub- 
ject of economic production has been overcome. This being 
true, it follows that the amount and direction of man's effort is 
finally governed by his wants. Therefore the quantity and qual- 



CONSUMPTION THE CAUSE OF PRODUCTION. 8 1 

ity of wealth permanently produced at any given time under 
normal conditions will ultimately be determined by the effectual 
desires and wants of the community. 

As elsewhere explained,* the difference between effectual and 
ineffectual desires is the difference in their power to induce 
the necessary effort for their gratification. Thus, desires become 
economically effectual just in proportion as they grow in inten- 
sity and their non-gratification inflicts more pain than is involved 
in the labor necessary to satisfy them. This explains why we 
see in some individuals, classes, and countries, a willingness to 
put forth great effort, and take great risk, in order to obtain 
things which others, while they might gladly receive, would do 
practically nothing to obtain. 

How, it may be asked, is this relation between desire and effort, 
consumption and production, to be ascertained ? How, for in- 
stance, do the producers know when the desires — or wants — of 
the consumers have reached the economic — or effectual — degree 
of intensity ? The answer is : by the willingness of the consumer 
to give the necessary effort, or its equivalent, to procure the satis- 
faction of his wants. 

For the same reason that economic wants, or demands, can 
only be recognized by the willingness to exert the necessary 
amount of effort for their gratification, to-morrow's effectual 
demands can only be estimated by the knowledge of to-day's con- 
sumption. If more of a given kind of wealth is wanted to-day 
than was produced, and this want is accompanied by a willing- 
ness to give the necessary effort, or its equivalent, to produce it, a 
greater quantity of the commodity will be produced to-morrow. 
And conversely, if more of a particular commodity is produced 
to-day than is effectually demanded, it will not all be consumed ; 
and in proportion as yesterday's production exceeds to-day's 
consumption, will to-morrow's production be limited. Although 
desire is the initial cause of production, its effective intensity 
and extent are economically measured by and registered in actual 
consumption. Consumption being the only economic measure 
of want, it is the real basis and final regulator of production. 
Simple as this truth is, it is far from being generally understood ; 
indeed, the reverse view is commonly held. Because wealth 

' Part I., ch. iii., p. 23. 



82 PHYSICAL AND SOCIAL WANTS, 

cannot be consumed until it is produced, it is contended that 
consumption must be determined by production. It is of course 
true that we cannot consume unless we produce, but it does not 
follow, on that account, that production sustains the causal 
relation to consumption. Although we must produce before we 
consume, we do not consume because we produce ; but we 
always produce because we consume, or that we may consume. 
Chronologically, production precedes consumption, but eco- 
nomically consumption precedes production and is the cause 
of it. 

If bows and arrows, tomahawks, spinning-wheels, or hand- 
looms were extensively manufactured in this country to-day, that 
would not cause them to come into general use again, nor would 
it have the slightest influence in that direction. Whenever a 
commodity is produced in advance of the effectual desire for it, 
loss, and perhaps bankruptcy, is the result. Were this otherwise, 
industrial depressions would be impossible, because an accumu- 
lation of products, or what is called over-production, could not 
occur. The mere fact of the goods being produced would, in 
that case, be a sufficient cause to create an effectual demand for 
them, and this, everybody knows, is not the .case. 

In order fully to understand the economic influence of con- 
sumption upon production, it is necessary to consider the subject 
in its qualitative as well as its quantitative aspect. The con- 
sumption, or effectual demand, is determined, as we have seen, 
by the established wants of the community. These wants are of 
two \i\T\.^^— physical and sociaL The former are mainly inherent,^ 
and comprise those wants which relate to physical sustenance 
such as food, clothing, and shelter. Social wants are mainly 
acquired, and comprise the tastes and desires that arise from th^ 
quickening influences of social intercourse ; these are luxuries 
first, but by frequent repetition finally become necessities 
social life. These two classes of wants have distinctive charac 
teristics, are increased by different influences, and have a^ 
entirely different effect upon production. 

Physical wants alone, of which food comprises the major pai 
cannot be increased in each individual to any considerable ex-j 
tent. The stomach of the savage will consume as much as thj 
of civilized man ; hence the effectual demand, through this clasi§ 



IMPORTANCE OF SOCIAL WANTS. 83 

of wants, can only increase in about the same ratio as the popu- 
lation. Moreover, these wants are mainly supplied by agri- 
cultural products which involve isolating and non-socializing 
occupations. 

There are many reasons why an increase of consumption from 
the mere increase of population would not promote the use of 
improved methods of production. It is characteristic of the use 
of improved methods that they are wealth-cheapening only in 
proportion as they are labor-saving. Unless the discharged 
laborers can be re-employed, idleness — the worst of social evils — 
will be increased. Therefore labor-discharging improvements can 
only be economically successful when they are accompanied by 
new employment-creating conditions, which an increase of the 
simple physical wants can never supply. 

It will readily be observed that, when an enlarged demand for 
commodities is entirely due to the increase of population, every 
discharged laborer involves a corresponding diminution of the 
market, thereby destroying the wealth-cheapening effect of the 
new methods. Consequently, all that is gained by the labor- 
saving process is lost by the increased idleness and contracted 
consumption. Thus it is that natural forces cannot be profitably 
employed in production except when the market for their pro- 
ducts increases faster than the population, /.<?., \ncrea.SQ'& per capita 
of the population. 

Social wants are essentially different in all their characteristics. 
They are the result of social, rather than cosmic, influences. 
They can be increased indefinitely in each individual, and can 
consequently be multiplied much faster than the population. 
They also furnish the demand for distinctively manufactured 
products, and so necessitate concentrated and socializing 
occupations. 

These features tend to promote the use of natural forces in 
several ways. Every addition to the number of social wants in- 
creases the quantity, and often the variety, of commodities each 
individual consumes. This necessarily increases the demand for 
products faster than the number of laborers, and with the growth 
of this demand the difficulty of supplying it is increased in two 
ways, (i) Just as the number of wants in each individual in- 
creases, the possibility of supplying them by hand-labor dimin- 



84 DEMOCRACY OF NATURAL LAW, 

ishes. (2) In proportion as the consumption of wealth by the 
laborer increases, the cost of his living, and consequently that of 
his labor, is correspondingly raised and the price of the product 
advanced. Since an attempt to supply the increased social wants 
by existing methods involves a corresponding increase of irksome 
labor, it neutralizes the advantage derived from the satisfaction 
of the new desires. Obviously, in this case, the new wants will 
be abandoned unless they can be supplied cheaper, i.e., with less 
labor, and this can only be accomplished by making natural 
forces do a portion of the work. 

When this point is reached all the conditions for utilizing im- 
proved methods are present. The new wants not only enlarge 
the established demand, but they create a market for a greater 
variety of products, the manufacture of which creates employ- 
ment for the laborers who have been discharged by the improved 
methods. 

Thus it is that, when wants multiply more rapidly than laborers 
increase in number, labor-saving methods do not create enforced 
idleness, as in the case of purely physical wants, because the same 
influences which compel them to discharge laborers in one 
industry create new employments for them in another. By this 
means the cost of producing each article is diminished and the 
price to the consumer is thereby lowered, so that, when the de- 
mand for commodities is increased by the multiplication of social 
wants, it not only makes the use of improved methods necessary, 
but it also introduces new employment-creating conditions which 
make them economically possible. Manifestly, therefore, natural 
forces become cheaper than human labor, only when the demand 
for commodities is enlarged by an increase in the social, rather 
than in ihQ physical, wants of the people. 

It is not enough, however, that this increase of social wants 
take place in a small class ; to be effective it must be general. 
Nature is very democratic — she will not work cheaply for the few. 
Steam and electricity can only be harnessed to production when 
their services are required to satisfy the numerous social wants, 
per capita, of large numbers of people ; consequently, the social 
consumption of the most opulent aristocracy is as impotent to 
furnish profitable employment for steam-driven machinery as is 
the meagre fare of a servile peasantry. Nor is the reason for 



NEW WANTS MAKE NEW MARKETS. 85 

this difficult to understand if we remember that capital can only 
be economically employed when it is cheaper than labor as a 
productive force. There are but two ways in which this can be 
brought about — either by reducing the cost of employing capital 
or by increasing the cost of employing labor. The cost of 
using capital can only be diminished by increasing the market 
for its products, in order that it may produce on a large scale. 
The cost of using labor can only be increased by enlarging the 
consumption and raising the wages of the laborer. Neither of 
these conditions can be furnished by an increase in the consump- 
tion of a small non-laboring class. An increase in the wants of 
such a class, though relatively very great, could not furnish a 
sufficiently extensive market to sustain the production of any 
commodity by factory methods ; and it could exercise no in- 
fluence in advancing wages, because the increased consumption 
does not enter into the life, and therefore affect the price, of the 
laborer. The chief economy in the use of capital being in the 
extent of its ability to save labor, the lower the wages the smaller 
the chances of its success — ^because the cheaper the man the less 
there is to be gained by saving his labor ; — consequently the 
necessarily limited market that the wants of a small class could 
supply would not guarantee a sufficient prospect of increasing 
returns, to warrant the investment of capital required for the 
adoption of steam-driven machinery. 

An increase in the social wants, and consequent consumption 
of wealth by the laboring classes, would furnish both of the 
essential conditions referred to. (i) Because they are so numer- 
ous that a slight increase in their consumption, per capita, would 
be an immense addition to the market, and at once warrant the 
production of commodities on an increasingly large scale. (2) 
Because the enlarged market, being due to the increased con- 
sumption by the laborers, raises the price of their labor, and 
consequently that of the commodities they produce — thereby 
making the use of labor-saving methods indispensable in order 
to keep these commodities salable. Every fall in prices from 
such causes extends the market still further, by putting the 
products within the reach of a larger class of consumers. There- 
fore, the truly civilizing consumption is that which results from 
the increased social wants of the masses ; for, by simultaneously 



86 HIGH WAGES MEAN LOW PRICES, 

increasing wages and reducing prices, it both raises man to 
the appropriation of wealth, and places wealth within the reach 
of man. 

A clear understanding of this principle will enable us to 
explain why the upper classes in ancient civilizations, with all 
their pomp, ostentation and almost profligate consumption of 
wealth, could not employ machinery ; why men were cheaper 
than machinery in the ninth century, as factors in production ; 
and why machinery is so much cheaper than men in the nineteenth. 
We find to-day, the world over, that the use of steam-driven 
machinery is the most general, wealth is the most abundant, and 
social development and political freedom the most advanced, 
where the social wants of the masses are the most numerous and 
the general rate of wages is the highest. 

In the light of this law we are also able to comprehend why, in 
the evolution of society, such great advances were made in phi- 
losophy and the fine arts before any of the simpler, though 
equally important, mechanical contrivances — i.e., the use of 
steam, electricity, etc. — were discovered. We can understand, 
for instance, why men could learn the courses of the stars and 
the revolutions of the planets before they knew how to make 
a good wagon-wheel ; why they could build a Chinese wall, or 
an Egyptian pyramid, before they could make a common plough ; 
why they could construct the Parthenon and the Colosseum 
before they knew enough to build a saw-mill, use movable types, 
or invent sewing-machines. 

The fact that the ancients excelled in sculpture, painting, 
music, etc., while we are devoted to producing common conven- 
iences and the decencies of every-day life, is frequently alluded 
to as evidence that ancient civilizations were superior to our own. 
I" This is a great mistake, the character of a civilization is not in- 
1 dicated by the individual accomplishment of a few, but by the 
I social condition of the great m.ass of the people. The error of 
' considering the earlier civilizations as superior to the present is 
mainly due to the failure to recognize the difference in the 
economic and social influences which determine the success of 
various discoveries, inventions, or attainments. 

These achievements may be divided into two classes. One in- 
cludes all those which can be accomplished by hand labor, and 



TWO KINDS OF DISCOVERIES. 87 

whose utility does not consist in their capacity to cheapen wealth, 
or their success depend upon the extent of appreciation among 
the common people. The other embraces those acquisitions 
whose utility consists in their ability to economize labor, and 
whose success depends upon the extent to which their results are 
consumed by the masses. For example, the discoveries of Euclid 
and Archimedes in mathematics ; those of Hipparchus, Al Ba- 
tain, Copernicus, Kepler, Galileo, and Newton in astronomy ; the 
accomplishments of Phidias, Scopas, Niccolo, and Ghiberti in 
sculpture ; those of Leonardo da Vinci, Michael Angelo, and 
Raphael in painting ; and in poetry, oratory, and the drama, the 
efforts of Homer, Cicero, and Shakespeare, were almost exclu- 
sively the result of the individual genius producing them. The 
success or failure of their undertakings did not depend, in any- 
appreciable degree, upon the material and social condition of the 
common people ; all they required in that direction was the 
patronage of a king, a pope, or a very limited aristocracy. 
• With the mechanical contrivances of the eighteenth and nine- 
teenth centuries, which have revolutionized the social condition 
of the civilized world, this has not been the case. The utility of 
movable types, of the printing-press, the spinning-jenny and 
the power-loom, the railroad, the telegraph, and the thousand 
other modern labor-saving contrivances, has consisted in the 
extent of their capacity to save human labor in its efforts to pro- 
cure the necessities and conveniences of social life ; and the 
success of these contrivances has entirely depended upon the 
extent to which their results have been demanded by the masses. 
If books had not been more generally read in the sixteenth, 
seventeenth, and eighteenth centuries than in the sixth, seventh, 
and eighth, Gutenberg's invention of the art of printing, in 1440, 
would have been as useless as it was when discovered in China 
two thousand years before. Upon the same principle that to set 
up and print a single copy of the " Wealth of Nations " to-day 
would cost $1,000 (while if fifty thousand were printed they 
could be sold at $1.00 each), the small number of books that 
were then demanded could be copied cheaper by hand than they 
could have been printed ; but when the masses began to use 
books, printing became cheaper than copying. 

So long as the consumption of cotton and woollen cloth, silks. 



SS CAUSE OF SOCIAL DECAY, 

laces, and carpets, and the multitude of various commodities 
produced from wood, tin, iron, brass, silver, gold, etc., was con- 
fined to the aristocracy, the small quantity required could be 
produced by hand-labor cheaper than by steam-power ; but when 
the millions began to use these things, the factory became cheaper 
than hand labor. 

If travel and transportation were limited to the upper classes, 
the discoveries of Stephenson and Fulton would be as useless to 
mankind as a machine to send water down hill. If none but 
millionaires patronized the steam-cars in New York City, it would 
cost more to ride on the elevated railroad than in a private car- 
riage ; but now that five hundred thousand people use it daily, 
every one can ride on it for a little over half a cent a mile. 

This is why an emperor of China could build a thirteen-hun- 
dred-mile wall, while he could not ride on a railroad. Rome 
could build the aqueducts, but she could not carry a newspaper 
three thousand miles for a cent. Euclid could develop the 
science of geometry, and Michael Angelo could paint the *' Last 
Judgment," but they could not make steel pens or parlor matches. 
Copernicus and Kepler could discover the course of the planets, 
and Newton the law of gravitation, but they could not make a 
type-writer, or publish a daily paper for one cent a copy. 

Had the ruling classes used their power as much to develop the 
social wants and character of the masses as they did to repress 
them, so that the printing-press and factory would have preceded 
the Pyramids and the Colosseum, those monuments of human 
slavery could never have been erected ; and the increased social 
susceptibility of the common people to the elevating influences of 
art, poetry, learning, and philosophy, might, and probably would, 
have saved those, so-called, civilizations from premature decay, 
and enabled the human race to avoid that historic nightmare, the 
" Dark Ages," by sustaining a continuous, progressive civilization. 

The more thoroughly we investigate the history of the industrial 
development of society, the more completely is the truth of the 
conclusions arrived at in the preceding pages of this chapter 
established. These may be briefly summarized as follows : 

(i) That all wealth is produced for the gratification of human 
wants. 

(2) That the active factors in production are, human forces 



LAW OF PRODUCTION SUMMARIZED, 89 

and natural forces ; the former being represented by labor, and 
the latter by capital. 

(3) That the cost of production, and consequently the price of 
commodities, diminishes in proportion as natural forces prepon- 
derate over human forces in the process of production. 

(4) That labor-saving appliances can only be successfully 
employed in production when they yield increasing returns to 
the capital invested. 

(5) That capital will only yield increasing returns when it can 
be employed cheaper than labor. 

(6) That labor-saving appliances can only become cheaper than 
hand labor when they can produce in large quantities. 

(7) That the possibility of producing on a large scale depends 
entirely upon the market being extended more rapidly than labor- 
ers increase in number — i.e., an increase in the consumption of 
wealth, per capita, of the population. 

(8) That such an extension of the market can only result from 
an increase in the social wants of the masses, which under modern 
conditions is synonymous with a rise in the general rate of wages. 

It may therefore be laid down, as a universal principle in social 
economics, that the labor-saving and wealth-cheapening capacity 
of natural forces can only be utilized as the social consumption 
of the laboring classes is increased. In other words, things can 
be cheapened only as man becomes dear ; and to increase the in- 
fluences which develop the social wants and raise the wages of the 
laborer is to make wealth cheaper than poverty, and civilization 
cheaper than barbarism. 



CHAPTER II, 



ECONOMIC VALUE. 



Section I. — Definition of Value, 

It is doubtful if there is a term in the vocabulary of economics 
about which there is such a lack of clear understanding as the 
word value. In popular phrase it has often a very elastic signifi- 
cation. It is sometimes used to indicate that which we give for 
things ; and it is quite frequently employed without any relation 
to exchange — as if it represented some inherent quality residing 
in the thing itself without regard to its relation to other things. 
For instance, we often hear such expressions as the value of pure 
air ; the value of sunlight ; the value of genius, of virtue, of re- 
ligion, of esthetics, of culture, etc. To give the word such a 
broad meaning is to deprive it of all specific significance as a 
scientific term. 

Although the necessity of avoiding this loose metamorphical use 
of the word has been generally recognized by leading economists, 
they have continued to employ it with such a variety of import as 
to leave its real meaning scarcely less obscure. 

In almost every treatise on this subject we find such expres- 
sions as : natural value ; market value ; use value ; exchange value, 
etc. Very frequently the effect of this indefinite use of the word] 
is to confound value with wealth. Much of this confusion has its] 
rise in that often quoted statement of Adam Smith in which he] 
says : " The word value, it is to be observed, has two different] 
meanings, and sometimes expresses the utility of some particulai 
object, and sometimes the power of purchasing other goods whicl 
the possession of that object conveys. The one may be called| 
value in use, and the other, value in exchange. The things whicl 

90 



RELATION OF UTILITY TO VALUE. 9 1 

have the greatest value in use frequently have little or no value in 
exchange ; and, on the contrary, those which have the greatest 
value in exchange have frequently little or no value in use." ' It 
would be difficult to find a statement that is more misleading, or 
one which has been more generally accepted than this. To use 
the word value to *' express the utility of a particular object " is 
entirely incorrect. 

Dr. Smith, or his disciples, would probably tell us that this is 
value in use. Such an expression is a misnomer. A thing may 
be important, or even indispensable in use — ^as in the case of the 
air and the sun, — but it cannot possibly be valuable in use. What 
is really referred to here is utility and not value. The difference 
between utility and value is fundamental : the former is the qual- 
ity of a thing ; while the latter is the relation, or proportion, 
between things. Such a view confounds the ratio of exchange 
with the cause of the exchange, and is fatal to any clear reason- 
ing on the subject. 

There is no scientific reason for using the word value to express 
utility under any circumstances ; or for accompanying it with 
qualifying expressions to indicate the kind of value. There are 
no kinds of value. The term should never be used to express 
qualities, but only the exchange relation of quantities. With this 
definition both terms assume a distinctive meaning and one which 
their use will always convey without qualification. Utility then, 
in economic science, always means the quality of a thing which 
makes it desirable, and for which something will be voluntarily 
given in exchange ; and value simply expresses the ratio in which 
the things are exchanged.* 

In order to avoid any misuse of the term value, as here defined, 
it should ever be remembered that it is purely an economic phrase, 
and relates exclusively to social phenomena. There can no more 

^ " Wealth of Nations," Book I., ch. iv., p. 21. 

^ Value in exchange expresses nothing but a ratio, and the term should not be used 
in any other sense. To speak simply of the value of an ounce of gold is as absurd 
as to speak of a ratio of the number seventeen. What is the ratio of the number 
seventeen ? The question admits of no answer, for there must be another num- 
ber named in order to make a ratio ; and the ratio will differ according to the 
number suggested. What is the value of iron compared with that of gold ? is an 
intelligible question. The answer consists in stating the ratio of the quantities 
exchanged." — Stanley Jevons' " Theory of Political Economy," p. 84. 



92 DEFINITION OF VALUE. 

be value without society than there can be ratio with a single 
thing ; the very idea implies a contradiction in terms. Value not 
only expresses the ratio of exchange but the ratio of economic 
exchange. An economic exchange must be mutually advanta- 
geous ; hence it must be an equitable exchange in which each gives 
an equivalent for what he gets. Exchanges in which one gains only 
by another's loss are highly uneconomic, inequitable, and so- 
cially injurious, and tend to extinguish themselves by the injury 
which they inflict. Economic value is indicated only by exchange 
relations which tend to perpetuate themselves by promoting gen- 
eral industrial and social well-being. I shall define value, there- 
fore, as the ratio in which different quantities of the various kinds 
of wealth and service will exchange as economic equivalents. 

In order that any object, or service, may have value according 
to this definition, it must be capable of being exchanged, and of 
satisfying the motives for exchange. To do this three conditions 
are necessary, (i) It must have utility ; it must have the capacity 
to serve some human purpose, or no one would care to possess it. 
(2) Its utility must depend upon human effort ; if it were gratui- 
tously supplied by nature, all could have it free, and however 
useful or desirable an object may be no one will give any thing in 
exchange for it if they can obtain it for nothing. (3) It must be 
transferable ; no matter how useful an article may be, or how diffi- 
cult to obtain, or how much labor may be devoted to its produc- 
tion, unless it can be transferred it is incapable of being exchanged, 
and no one will give any thing for that which they can never pos- 
sess. When these conditions are all present at once, profitable 
exchange, and therefore economic value, becomes possible. 

Section II. — -The Relation of Value and Price, 

John Stuart Mill considers that a clear understanding of eco- 
nomic principles requires that a discrimination be made between 
value and price. The former he defines as the ratio in which 
commodities will exchange for one another ; the latter, that in 
which they will exchange for money/ In order to maintain this 
distinction he adds to the already confusingly numerous kinds of 
value, the phrase, " money-value," which has been accepted by all 

^ " Principles of Political Economy," vol. i., p. 538. 



VALUE AND PRICE IDENTICAL, 93 

leading writers since his time.' This expression, however, like 
Adam Smith's " value-in-use," and Ricardo's " natural-value," 
tends to befog rather than to clarify the subject. 

A little consideration will show that there is no more scientific 
necessity for saying money-value than there is for saying wheat- 
value, potato value, cloth-value, or mutton-value. If the word 
price were used in these cases it would convey precisely the same 
meaning. Price, like value, expresses the ratio of exchange and 
nothing else. Whether the exchange is commodities for com- 
modities, services for services, services for commodities, com- 
modities for money, or money for labor, makes no real differ- 
ence. The proportion in which either exchanges for the other 
indicates the value of each ; and equally so is the price of a thing 
indicated by that which is given for it. Indeed, we have the ex- 
plicit authority of Mill himself for saying that '' when goods are 
exchanged for money they are the price of the money, just as 
much as the money is the price of the goods.'" 

Obviously, then, the distinction between value and price is as 
unnecessary as the use of exchange-value and natural- value is mis- 
leading. Even admitting that price expresses only the ratio in 
which things or services exchange for money, since all exchanges 
are now constructed in terms of money, price and value are eco- 
nomically equivalent terms. 

The distinction between price and wages, however, is somewhat 
different. Popular phrase has always expressed the value of com- 
modities and services in different terms ; value or price having 
been used in the case of commodities and wages in the case 
of labor. Although there may be no real technical necessity for 
making this discrimination, its adoption does not lessen the clear- 
ness of statement, and its abolition would tend to confuse, rather 
than to clarify, the mind of the student. If it could be shown 
that, in the strictest sense, price, value, and wages all have the 
same meaning, it would certainly be a matter of doubtful ex- 
pediency to attempt to employ them as interchangeable terms. 
For while it might not be especially inconvenient to call wages 
the value, or price, of labor, it would be decidedly novel, and not 

^ "I have used the word price as signifying the money-vahie of goods." — 
Walker's "Political Economy," p. 135. 

' " Principles of Political Economy," Vol. II., Book III., ch. viii., sec. 2. 



1; 

L 



I 



94 MISLEADING USE OF TERMS, 

a little misleading, to speak of the wages of potatoes, pumpkins, 
or pine-apples. 

The unnecessary distinction between value and price has not 
been limited to mere nomenclature, but it has been carried to the 
actual sphere of economic movement. 

The accepted expounders of political economy emphatically 
deny the possibility of a general rise or fall of values^ declaring 
it to be " a contradiction in terms." Then, almost in the next 
breath, they insist that a general rise or fall of prices can, and 
frequently does, take place.' If every thing cannot rise or fall in 
value simultaneously, how can the /r/^<? of every thing do so? 
The usual reply, that/r/V<? is simply the ratio in which things will 
exchange for money, is wholly inadequate to explain this differ- 
ence. For instance, if the proportion in which commodities will 
exchange for money were increased, that would, of course, be a 
fall in the price of the commodities ; but it would also be, as Mill 
has clearly shown,^ a rise in the price of money to exactly the 
same extent. On the other hand, if the ratio in which money and 
other commodities would exchange for wheat were increased, that 
would be a rise in the value of wheat and a fall in the value of 
money and all other commodities. Manifestly, the rise of value 
in the one case would be just as general as was the rise oi price 
in the other case. It is just as impossible to have a rise in price 
without a relative fall in the price of some one or more of the 
factors to the exchange, as it is to have a rise of value in one or 
more commodities without a corresponding fall in some others. 
There are absolutely no conditions, actual or conceivable, in which 
a variation of prices is possible, which would not make a similar 
variation of values equally so. The fact that the v^ord price relates 
to the ratio in which commodities exchange for money is of no 
more importance, either in theory or practice, than if it referred 
to the ratio in which money and other products exchanged for 

* ' ' Though there is no such thing as a general rise of values, there is such a 
thing as a general rise of prices." — Mill's " Principles of Political Economy," 
Vol. I., Book III., chap, iv., sec. 2, p. 565. "While a general rise or a general 
fall of values is a contradiction in terms, a general rise or a general fall in prices 
is a perfectly possible, as indeed it is a not uncommon event." — Cairnes : ' ' Some 
Leading Principles of Political Economy," p. 12. 

'" Principles of Political Economy," Vol. II., Book III., chap, viii., sec. 2. 



ERROR OF ORTHODOX THEORY, 95 

cotton, coal, or corn ; because the price or value of mony is gov- 
erned, as we shall hereafter see, by exactly the same influences as 
is every thing else for which it will be received in exchange. 
Evidently there is no good reason for creating a distinction 
between value and price, and the accepted dogma that "though 
there is no such thing as a general rise of values, there is such a 
thing as a general rise of prices," is both confusing in theory and 
fallacious in fact. 

Section III. — Is a General Rise or Fall in the Value or 
Price of Commodities Possible? 

Two points in relation to value are now clear : (i) that it ex- 
presses nothing but the ratio of exchange ; (2) that for all the 
purposes of economic science, value and price are equivalent 
terms, — hence any movement of one is equally possible to the 
other. From this it follows that if " a general rise or fall in the 
value of commodities is impossible," then there can never be a 
general rise or fall of prices ; and conversely, if there can be a 
general rise or fall in the price of commodities, there may be 
a general rise or fall in their value. That there can be a general 
rise or fall in the price of commodities our economists all admit ; 
and that there has been a general fall in the value of commodities 
is demonstrated by the most obvious facts in modern industrial 
history. Since value and price are of synonymous import, and 
a general movement in the value of commodities can and does 
occur, an explanation of this phenomenon, consistent with the 
idea that value simply expresses the ratio of exchange, may 
properly be demanded. The difficulty hitherto experienced in 
dealing with the question of value has arisen from the mistaken 
point of view from which the subject has been considered. The 
error lies in regarding value as a physical instead of a social 
phenomenon ; and, consequently, in treating it as if it referred 
only to the exchange relation of things to things, instead of the 
relation of things to man. There are no economic exchanges in 
which wealth constitutes all the elements ; for man — human ser- 
vice—is always the principal factor. All exchanges are made by 
man and for man — the object always being to gratify some desire 
for which he must, directly or indirectly, render service. In the 
last analysis exchange will always be found to consist in giving 



96 MISTAKEN POINT OF VIEW, 

service for gratification — i.e., labor for wealth, though nominally 
different qualities of wealth are being exchanged. 

When we say the price of a commodity has risen or fallen 
because it will exchange for a larger or smaller amount of gold, 
the statement would have no significance but for the fact that the 
variation in the ratio in which the commodities exchange for gold 
indirectly expresses that in which ^they will exchange for labor. 
The rise in the value of commodities means that the articles 
referred to have become dearer — more difficult for man to obtain 
— or it means nothing. Wheat cannot be either dear or cheap to 
potatoes or to gold, any more than shoes can be dear or cheap to 
fishes. The value of wheat may be high as compared with that of 
potatoes or gold, but it is not high to those articles. It is only 
high /^ man. Nor is it high to him because it will exchange for 
a larger quantity of things, but solely because it will exchange 
for a larger quantity of his labor. Therefore, when we speak of 
a rise or fall in the value of commodities we always mean, directly 
or indirectly, an increase or diminution in the ratio in which 
commodities will exchange for labor. 

When we once clearly recognize that it is the exchange relation 
of wealth to man that is to be considered, and not merely the 
relation of things to each other, much of the difficulty connected 
with this subject disappears. The hitherto inexplicable phenome- 
non — of a general rise and fall in the value of commodities — now 
becomes both possible and entirely rational. It will readily be 
seen that while all commodities cannot simultaneously rise and 
fall in their relation to each other, they can all do so in their 
relation to labor. And since, ultimately, it is only to the extent 
that the ratio varies in which commodities exchange for labor 
that their value can rise or fall, it is just as possible for the value 
of all articles to rise and fall together as it is for any portion of 
them to do so. 

There is another phase of this subject that has been a con- 
stant source of perplexing controversy, but which, from this point 
of view, becomes easy and simple of explanation. It has been 
held by many able writers that, because value expresses simply a 
relation, when two commodities vary in the ratio in which they 
will exchange for each other we cannot strictly say that the one has 
risen or that the other has fallen in value, but that both have 



EJ^ROR OF MILL AND CAIRNES. 97 

risen and fallen in relation to each other. If, for example, two 
bushels of potatoes would exchange for one bushel of wheat last 
year, and one bushel of wheat will exchange for three bushels 
of potatoes this year, they hold that it is just as correct to say 
that the value of the wheat has risen as it is to say the value of 
the potatoes has fallen ; that it is simply a variation in their 
exchange relations, — the fall in the one case implying a rise in 
the other, and vice versa. This kind of reasoning is very perplex- 
ing ; it logically forbids us to speak of the rise or fall in the value 
of commodities by depriving the expression of all real significance 
regarding the object to which it refers. But when we consider 
the question from the point of view that value finally expresses 
the exchange relation, not of things to things, but of things to 
man, we have no difficulty in deciding whether the value of the 
potatoes has fallen or that of the wheat has risen. Then the 
statement that the value of a given commodity has increased or 
decreased is strictly correct, and conveys a specific idea regarding 
a particular object. It always indicates the variation in the 
exchange relation of that commodity to labor. 

It is therefore not correct to say, with Mill, Cairnes, and others, 
that a fall in the value of potatoes as compared to that of wheat 
necessarily implies a rise in the value of the wheat. On the con- 
trary, there may be a simultaneous rise or fall in the value of all 
commodities, or the value of the various commodities may rise or 
fall in different degrees, or the value of some of them may rise 
or fall, while that of the others remains entirely unchanged. 

To illustrate this point more fully, let us suppose that a day's 
labor will exchange for one bushel of wheat, or for two bushels 
of potatoes. In this case the wheat will exchange for the pota- 
toes in the ratio of one to two, while it will exchange for a day's 
labor in the ratio of one to one. The wheat is now twice as dear, 
per bushel, as the potatoes. Suppose that another year a day's 
labor will exchange for three bushels of potatoes, but it continues 
to exchange evenly for one bushel of wheat. Of course, under 
such conditions, the wheat will exchange for potatoes in the ratio 
of one to three, instead of one to two as before. Obviously the 
value of the potatoes will fall one third, because one third more 
of them can be obtained for a day's work. It cannot be said in 
this latter case that the fall in the value of the potatoes implies 
9 



I 



98 RELA TION OF THINGS TO MAN. 



a rise in that of the wheat, because a day's labor continues to 
exchange for exactly the same amount of wheat as before. 
Clearly, therefore, the value of the wheat remains unchanged 
while that of the potatoes falls one third. Nor does the value of 
the potatoes fall merely, as compared with, or in relation to, that 
of the wheat, but they become one third cheaper absolutely 
without any regard to the wheat whatever. 

We may be reminded that the price of labor varies in different 
countries, industries, and localities. But that fact in no way 
alters the case ; whether the laborer gets fifty cents or five dol-: 
lars a day makes no real difference in the operation of the prin- 
ciple. If one day's labor of the fifty-cent man will exchange for 
ten pounds of flour, or two pounds of butter, then that of the 
five-dollar man will command a hundred pounds of flour, or 
twenty pounds of butter. Any variation in the ratio in which the 
flour or butter will exchange for a day's service of either of these 
laborers will obtain with all laborers, and hence will constitute a 
change in the value of those commodities to that extent. But no 
variation in the ratio in which flour or butter will exchange for 
any or all other commodities — including silver or gold (which are 
likewise commodities), will make the slightest change in their 
value, unless it alters the proportion in which they will exchange 
for labor. 

Therefore it is incorrect to say *' a fall in the value of one or 
more commodities necessarily implies a rise in that of all other 
commodities, and vice versa'' On the contrary, there may, as we 
have seen in the case of the potatoes and wheat, be a rise or fall 
in the value of one or more articles in the market without any 
change in that of the others. But while it is not true that a fall 
in the value of one or more commodities necessarily implies a 
rise of that in all others, it is true that a fall in the value of any 
or all commodities implies a rise in the value of services, and vice 
versa. The reason for this difference is easily understood. It is 
simply because, ultimately, value, as applied to commodities, ex- 
presses nothing but the ratio in which they will exchange for 
labor, and no amount of increase in the intricate complexity of 
the process of exchange can alter this fact in the slightest degree. 

It will thus be seen that, when we change our point of view and 
regard man and his desires as the centre of all economic move- 



I 



THE NEW POINT OF VIEW. 99 

ment, — treating value as a social phenomenon and using the term 
exclusively to express the exchange relation of things to man, — 
the whole subject appears in a new light. Then the perplexing 
distinctions between the numerous kinds of value, and between 
value and price, and the difference in the possibility of values 
undergoing the same general rise or fall as prices, all become 
unnecessary. 

The term value being used solely to express the ratio of ex- 
change, />., the proportion in which man will give service for 
wealth or gratification, — it will always convey the same idea and 
never be misunderstood. And if we regard the word utility as 
expressing simply the want-gratifying qualities of any portion 
of man's environment, its meaning is at once simple, definite, and 
unmistakable. Thus understood, utility and value both become 
distinctive, intelligible terms — the former expressing the quality 
for which things are desired by man, and the latter the propor- 
tion in which he will give his service in exchange for them. 
With these definitions it is scientifically correct to say the value 
or price of any or all commodities may rise or fall separately or 
simultaneously. Indeed, were it otherwise, social progress would 
be impossible, because it is only in proportion as wealth in gen- 
eral becomes cheaper that human well-being can be increased. 

In order to furnish a scientific basis for increasing the ratio in 
which labor exchanges for wealth in accordance with the uncon- 
scious operation of social law, it is necessary, first of all, to 
understand the principle upon which different quantities of the 
various kinds of wealth and service become economic equiva- 
lents. This will explain the law of economic value and will next 
occupy our attention. 



I 



CHAPTER LII. 

DEMAND AND SUPPLY NOT THE LAW OF ECONOMIC 

PRICES. 

Section I. — The Doctrine Stated. 

Mill says : " A writer does but half his duty by stating his own 
doctrines if he does not also examine, and to the best of his 
ability judge, those of other thinkers." While this is true of all 
questions in economics, it is especially true of the doctrine of 
prices. No treatment of that subject can be complete which does 
not consider the claims of the theory of supply and demand — a 
theory which is practically universal. Although the question of 
prices has never been free from controversy since the time of 
Adam Smith, scarcely a book on economics has been published 
subsequent to " Wealth of Nations " in which the ratio between 
supply and demand has not, expressly or tacitly, been accepted as 
the law of prices.' 

This doctrine affirms : (i) That under free competition {i.e., 
in the absence of arbitrary barriers) there cannot be two prices 
for the same commodity in the same market. (2) That when the 
supply and the demand are equal the price is the exact equiva- 
lent of the cost of production. (3) That the price rises as the 
demand exceeds the supply, and falls as the supply exceeds the 
demand ; and, " the rise or fall continues until the demand and 
the supply are again equal to one another." In order to sustain 

1 Perry's "Political Economy," p. 211. Mill's "Principles of Political 
Economy," Vol. I., Book III., ch. ii., p. 252. Price's "Practical Political 
Economy," p. 188. Jevons' " Theory of Political Economy," p. 6. (Preface). 
MacLeod's "Elements of Political Economy," p. iii. Cairnes' "Leading 
Principles of Political Economy," p. 183. 

100 



GREGOR V KING 'S LA W. lOI 

this claim, two propositions must be established : {a) that the 
value of all commodities and services always rises and falls as the 
demand exceeds or falls short of the supply ; which movement 
" continues until the demand and the supply are equal " ; {b) that 
the variation in the price is produced by the alternation in the ratio 
of the demand and supply. Unless these postulates can be sus- 
tained, the doctrine of demand and supply must be rejected as 
inadequate to furnish a scientific law of value. Although this 
doctrine has always been held to apply to both commodities and 
labor, in order to simplify the discussion we will consider it in 
relation to these factors separately, taking commodities first. 

In the seventeenth century, Gregory King observed that the 
price of commodities varied with the demand and supply as 
follows : 

A decrease in the supply of : 

1 tenth raises the price above the common rate j 3 tenths. 

2 tenths " " " " " " " ^l^tenths. 

3 tenths " " " " " " " i-6 tenths. 

4 tenths " " " " " " " 2-8 tenths. 

5 tenths " " " " " " " 4-5 tenths. 

Despite the modifying effect of the " cost ot production," in- 
troduced by Smith and Ricardo, this scale of variation in prices, 
which was based entirely upon agricultural products, has been 
practically accepted as the law of all prices ever since. Even 
Thorold Rogers repeats this formula in his latest work, with 
emphatic indorsement as " one of the most important generaliza- 
tions in statistics, and applicable to all values whatever." ^ 

The reason the early writers upon this subject confined their 
studies chiefly to agricultural products is not difficult to under- 
stand. During the time of Gregory King and even down to 
the nineteenth century, agricultural products constituted the 
chief articles of consumption for the great mass of the commu- 
nity. During the present century, and especially the last fifty 
years, this has been greatly changed. The proportion in which 
manufactured, as compared with agricultural, products enter into 
the daily consumption, is steadily increasing as civilization 

* " Eonomic Interpretation of History," p. 55 (1888). Jevons reaffirms it in 
his "theory of Political Economy," pp. 168-171. 



102 AGRICULTURAL PRODUCTS, 

advances. Consequently if the agricultural hypothesis furnishes 
the true law of prices, it must be applicable to the prices of man- 
ufactured as well as agricultural products. 

Of course the true law of prices must explain the-movement of 
all prices, but no hypothesis can be assumed to do so merely 
because it affords a seemang explanation of one class of prices. 
The recognition of this fact is especially important in this 
connection because the production of manufactured and agricul- 
tural commodities is frequently affected by widely different 
influences. In agriculture the quantity and quality of products 
are often largely determined by purely cosmical forces — the 
operation of which is entirely outside the domain of economic 
law, — while, in manufacture, nearly all the influences affecting 
production are economic and social. Consequently we may 
naturally expect to find any theory constructed upon purely 
agricultural data to be inadequate to explain the prices of manu- 
factured products. 

It is undoubtedly true that the price of wheat, potatoes, apples, , 
peaches, or any other farm or garden product tends to rise or 
fall with the relative increase or diminution of the demand or the 
supply. The fact that the price of wheat will rise with a failure 
of the crop and fall with an abundant yield may be counted 
upon as unmistakably as any other fact in nature. It is also 
true that in all such cases the rise or fall in the price continues 
until the demand and supply are approximately equal. Nor isj 
there any doubt that this rise or fall in the price of agricultural! 
products indicates a corresponding change in the ratio in which 
they will exchange as economic equivalents. So far as agricul-, 
tural products are concerned, therefore, the facts seem to accord] 
with the theory.^ 

Let us now see how the case stands with the price of manufac- 
tured products. According to this hypothesis, whenever the] 
quantity of cotton cloth, shoes, or other manufactured commod-j 
ities is greater than the quantity effectually demanded, the price] 

' This will be true, however, only so far as the variation in the demand anc 
supply is due to cosmical influences, such as favorable or unfavorable seasons. 
But if the over-supply should be due to the cultivation of a larger number of 
acres under traditional conditions this would not occur, and any fall in the 
price would involve loss or bankruptcy to the farmer. 



MANUFACTURED PRODUCTS, I03 

of the article will fall, and the fall will continue until the demand 
and the supply are equal/ If this theory were correct, there 
could never be what is called, "an over-production," at least, 
until the quantity of cloth, shoes, etc., was so great that they 
could not be consumed at any price. Because, it will be remem- 
bered, if the supply more than equals the demand the price will 
fall to " the point which equalizes the demand and the supply," ^ — 
which must be the point at which all the product can be sold. 
As a matter of fact, this is what almost never occurs under such 
circumstances. There is probably no large manufacturing and 
commercial centre in the world in which the supply of a large 
number of commodities is not greatly in excess, of the demand. 
And yet the price does not continuously fall, but in a very large 
majority of such cases remains practically steady for years together. 

Industrial depressions are specifically cases of this kind. The 
characteristic feature of an industrial depression is that manufac- 
tured commodities are produced in greater quantities than they 
can be sold. The expression "over-production" simply means 
that the supply is in excess of the demand. Instead of the 
movement of prices under these conditions being that which is 
predicated by the demand-and-supply theory, it is entirely differ- 
ent. There is a tendency to equalize the demand and supply, 
but it is brought about by an entirely different process than the 
fall in prices ; as laid down in the popular theory. 

The first symptoms of an over-production, or excess of supply, 
is the difficulty in selling the entire product. This will generally 
be followed by an increased competition among the manufac- 
turers and merchants — especially those who have large margins 
— and will tend to reduce the price toward the point at which 
they can barely sell without loss — which point is nearly always 
reached long before the demand and supply are equalized. 
Here, however, an entirely different movement sets in and the 
fall is transferred from the price to the quantity of the commod- 
ity. Instead of the price continuing to decline until an equilib- 
rium between demand and supply is reached, the fall in price is 
arrested at the no-profit point, and the decline in the amount of 
sales commences. As the sales fall off warehouses are filled, 

* "Principles of Political Economy," vol. i., pp. 551, 552. 
'^ Ibid., p. 550. 



104 RICARDO SAW THE FALLACY. 

profits shrink, and the incentives to produce are diminished ; 
hence the supply is curtailed to prevent further loss. Thus, in- 
stead of the demand and the supply being equalized by a contin- 
uous fall in the price and larger sales, that result is reached by 
lessening production — which involves the closing of factories, 
enforced idleness of laborers, and sometimes the bankruptcy of 
manufacturers and merchants/ It will be seen, therefore, that 
the equilibrium between demand and supply is reached — if 
reached at all— by reducing the supply to the dimensions of the 
demand 2I paying prices, and not by lowering the prices to that of 
demand and supply. Moreover, if the price of commodities 
under these conditions continued to fall until the demand and 
the supply were equalized, as in agriculture, it would not be, as 
in that case, an exchange of economic equivalents, but it would 
be a highly uneconomic exchange, involving continuous loss, and 
probably ruin, to the producers. 

Were the conditions reversed the same principle would govern 
the movement of the phenomenon. If the demand for shoes 
greatly exceeded the supply, the demand and supply would not 
be equalized by the increased price, but by an increase in the 
supply. It is exactly under such conditions that nev/ factories, 
with improved methods, come into existence. This gives more 
employment to labor ; enlarges the market ; cheapens the cost of 
production ; and tends to make profitable sales at lower prices 
possible. Thus it is clear that the price does not necessarily fall 
when the supply exceeds the demand, nor rise when the demand 
exceeds the supply. This much of the fallacy of the demand- 
and-supply theory was evidently clear to Ricardo, who probably 
had more glimpses of fundamental truth in economics than any 
other writer of this century. He says ^ '• " Diminish the cost of 
production of hats, and their price will ultimately fall to their 
new natural price, although the demand shall be doubled, 
trebled, or quadrupled. Diminish the cost of subsistence of men, 
by diminishing the natural price of the food and clothing by 
which life is sustained, and wages will ultimately fall, notwith- 
standing that the demand for laborers may very greatly increase." 

' This is equally true of agriculture where the increased supply or over-pro- 
duction is due to increased investment instead of gratuitous natural forces. 
^ " Principles of Political Economy and Taxation," ch. xxx., p. 232. 



THE THEORY DOES NOT FIT THE FACTS. I05 

There is still another important fact that here presents itself 
for the demand- and- supply theory to explain. If the value of 
commodities is governed by the ratio between the demand and 
the supply, why has the value of manufactured articles steadily 
fallen during the present century, in some cases sixty and seventy 
per cent., while the value of farm and garden products has gen- 
erally risen, and in some cases very considerably. It cannot be 
because the relative demand for agricultural products, as com-« 
pared with the supply, has been greater than that for manufac- 
tured commodities, because, in that case, the profits of agriculture 
would have been greater during the period than those of manu- 
facture and trade, whereas the reverse is true. For the same 
reason the fall in the price of manufactured articles cannot be 
attributed to the excess of supply as compared with agriculture. 
Now, if the normal price of commodities were governed by the 
ratio between demand and supply, this phenomenon would be an 
economic impossibility. Nor can it be objected that the fall in 
the price of manufactured articles is like that in the auction sale, 
— at the expense of the seller. The manufacturers of cotton 
cloth, who to-day sell their product at four cents a yard, are 
economically as well off as were those who received eighteen or 
twenty cents a yard a hundred years ago. In other words, to 
give twenty yards of cotton cloth for one dollar to-day is just as 
equitable an exchange of economic equivalents as it was to obtain 
a dollar for six yards in 1820. This is not the exception, but the 
rule, and represents the normal economic movement in modern 
society ; clearly therefore the theory of demand and supply is 
wholly inadequate to explain the movement in the economic price 
of commodities. 

Section II. — Does the Price of Labor Obey the Law of 
Demand and Supply ? 

In the case of labor the failure of this theory will be found to 
be no less conspicuous. If the doctrine were true, that wages 
always fall when the supply of labor is in excess of the demand, 
enforced idleness or able-bodied pauperism would be impossible, 
as we have elsewhere pointed out.* In that case, as soon as un- 
* " Wealth and Progress," Part II., ch. i., sec. i. 



Io6 WAGES FAIL TO OBEY THE LAW, 






employed laborers appeared wages would begin to fall, and the 
fall would continue until all the laborers were employed at some 
price, that being the only point at which the demand and the 
supply could be equalized. So far from this being the rule, there 
is not a country in all the world in which it ever occurred. There 
may have been times and places when laborers were all employed, 
but this was never accomplished by the lowering of wages. 
History does not afford a single instance of abolishing enforced 
idleness, and reducing able-bodied pauperism, by that means. 
Such a phenomenon is an economic impossibility. Every fall of 
wages tends to lessen the general consumption of wealth, and 
thereby diminish rather than increase the employment of labor. 
As a matter of fact, wages do not fall ; any thing like a general 
fall of real wages is practically an unknown phenomenon. 

It is one of the distinguishing characteristics of the history of 
industrial evolution that, since the dawn of the wage-system, 
neither royal authority, civil law, religious dogma, or any other 
industrial or social pressure, has been able to permanently force 
the price of labor below the point that has once been generally 
established in a community, although the supply has frequentl)| 
been greatly in excess of the demand. The statistics of able 
bodied pauperism, and the history of poor-law legislation, furnis 
abundant evidence of the over-supply of labor during the lai 
three hundred years. The same fact is clearly shown in th 
economic literature of the period, which abounds with the dis 
cussion of the pauper problem. It was the alarming extent t 
which the supply of labor was continuously in excess of the d 
mand, which gave rise to the Malthusian doctrine of limiting th 
population by curtailing births among the laboring class. Thii 
doctrine has been generally accepted by economists during th 
present century, both in Europe and this country, as the onl; 
means of raising wages. Yet in the face of this continuous overj 
supply of labor, wages have risen seven hundred per cent. It i 
therefore clear that wages do not necessarily fall when the suppl 
of labor is in excess of the demand, but that they may, and ofte 
do, rise in spite of that fact. It is very doubtful if it can b 
shown that a single step in the rise of wages, from twelve cen 
to two dollars a day, has taken place in accordance with th 
doctrine of demand and supply, but almost invariably contrar 



THE BASES OF EQUIVALENCE. 10/ 

to it. Obviously, therefore, the first postulate upon which the 
demand- and supply-theory is based, namely, that the prices of 
all commodities and labor rise and fall as the relative demand 
exceeds or falls short of the supply, utterly fails. 

Section III. — Economic Prices caiinot Possibly be Determined 
by the Mere Ratio between Demand and Supply. 

We come now to the second postulate upon which this theory 
rests, namely, that the variation in the price of commodities and 
labor is caused by the alteration in the rate of demand and supply. 
Although the variation in price may often be similar to that in 
the demand and the supply, it can easily be shown that the mere 
proportion between the quantity demanded and supplied cannot 
possibly determine economic value. The very idea of value is 
quid pro quo. The conception of economic exchange necessarily 
implies that each obtains an equivalent for what he gives. 
Therefore, in seeking the law of value, we are not seeking to ex- 
plain that process of exchange by which, through ignorance, 
fraud, and other devices, one can get the advantage of another ; 
but we are seeking the law by which different quantities of various 
kinds of wealth and service can be equitably exchanged as the 
economic equivalents of each other, and according to which a 
given amount of service can become the equivalent of an increas- 
ingly large amount of wealth. 

In what sense, then, are commodities the equivalents of each 
other ? It cannot be their similarity in quantity, quality, or 
form, because it is their very dissimilarity in these respects which 
makes their exchange desirable and necessary. The only sense 
in which different quantities of various kinds of commodities and 
services can be the equivalents of each other is as economic 
products — i.e., in the sense that they represent the same amount 
of economic expenditure. An econonomic equivalent is that 
which will afford as much gratification to the buyer as he could, 
with due preparation, otherwise have obtained by the wealth and 
service devoted to procuring that which he gave for it. Can this 
be in any way affected by the mere presence or absence of 
quantity ? Is there any thing in the fact that the demand is 
greater or smaller, or equal to the supply, that can make differ- 



io8 Mcculloch' s testlmony. 

ent quantities of wealth and service, — the procuring of which 
involves different amounts of expenditure, — the economic equiv- 
alents of each other ? ^ 

If one gives a day's labor to procure a pair of shoes, and then 
exchanges the shoes for twenty grains of gold, unless he can 
obtain as much of other commodities, or service, for the gold as he 
could for the labor that he put into the shoes, the gold is not the 
economic equivalent of the shoes. Whether or not the gold will 
reimburse him for making the shoes — /.<?., will be an equivalent 
for the shoes — cannot possibly be affected by the mere fact that 
there are many or few grains of gold. The ability to exchange a 
pair of shoes for twenty grains of gold, as an equivalent, can no 
more be affected by an increase or a decrease in the number of 
shoes or the quantity of gold than the weight of a pound of lead 
can be affected by the presence of a larger or smaller number of 
pounds of lead. There is absolutely nothing that can enable a 
man to give his shoes for the gold, without losing, which does not 
enable him to obtain the shoes with a smaller amount of wealth 
and service. McCulloch pointedly remarks ^ : " No variation of 
demand, if it be unaccompanied by a variation in the cost of 
production, can have any lasting influence in price. If the cost 
of production be diminished, price will be equally diminished, 
though the demand should be increased to any conceivable ex- 
tent. If the cost of production be increased, price will be equally 
increased, though the demand should sink to the lowest possible 
limit." As the proportion between the demand and supply can- 
not enable the producers of either gold or shoes to make their 
articles one fraction cheaper, it canot affect the ratio in which 
these articles will exchange as economic equivalents, and conse- 
quently cannot determine their economic value. 

To recapitulate, then, four important facts are established, — 
any one of which is sufficient to invalidate the claim of the theory 
that the ratio between demand and supply is the law of economic 
prices. They are : (i) That the value of commodities and labor 
does not always rise and fall as the demand exceeds or falls short 
of the supply, and so continue until the demand and the supply 
are equalized. (2) That prices may and do rise when the supply 

^ De Quincey's " Logic of Political Economy," p. 8. 

' " Principles of Political Economy," Part III., sec. iii., p. 137. 



CAIRN ES' ERROR, IO9 

is in excess of the demand, and fall when the demand is in excess 
of the supply. (3) Th^t prices may and do rise or fall without 
any perceptible change in the ratio between the demand and the 
supply. (4) That, from the nature of things, it is impossible for 
the mere scarcity or abundance of quantity to alter the ratio in 
which different quantities of wealth and service become economic 
equivalents of each other. 

Section IV. — TJie Economic Relation of Demand to Supply. 

Sometimes the most effective way of showing what a thing is 
not, is to to explain what it is. The error of the doctrine that 
economic prices are determined by the ratio between demand 
and supply will become still more apparent if we examine the 
economic relation which these phenomena sustain to each other. 
We shall then see that this quantitative relation is more the con- 
sequence than the cause of economic prices. 

Attention has already been called to the fact that, while econo- 
mists have defined value as the ratio in which quantities exchange, 
they have treated the subject as relating exclusively to wealth. 
The natural outcome of this position is that even such a careful 
writer as Cairnes ^ has insisted, that demand and supply are iden- 
tical phenomena — " Simply different faces of the same fact." 
The only effectual demand being actual supply, and vice versa. 
Consequently, the only way to increase the demand for one class 
of commodities is to enlarge the production of other commodities 
to exchange for them, or, as Cairnes "^ expressly states : " Pur- 
chasing power, in the last resort, owes its existence to the pro- 
duction of a commodity and, the conditions of industry being 
given, can only be increased by increasing the quantity of com- 
modities offered for sale ; that is to say, demand can only be 
increased by increasing suyply." Accordingly, the panacea for 
a glutted market — " over-production " — is more production, — a 
delightful tonic for industrial depressions. 

The inevitable effect of this view of the subject, which limits 
economic phenomena to wealth and makes demand and supply 
identical facts, — each equally dependent upon the other — is to 

^ "Some Leading Principles of Political Economy," ch. ii. 
' Ibid., p. 31- 



no MISTAKEN IDEA OF DEMAND. 

reduce economic movement to a vicious circle and make progress 
impossible. The result of this class of reasoning was recently 
illustrated in the attitude of a gentleman, who had devoted more 
than a generation to the study of economics, and had digested 
the literature of several languages upon the subject. He clearly 
saw the social necessity of doing something to improve the labor- 
er's condition ; but it was equally clear to him that this must be 
done by scientific means. He said (and in a protracted cor- 
respondence repeated the argument in several ways): '^ We are all 
anxious that the laborer sh'ould receive more wealth. This he 
can do in but one of three ways : by theft, charity, or economic 
exchange. To increase his income through either of the first two 
would be to injure instead of to help him, and he can only obtain 
more wealth through exchange by having more to give for it, 
which is exactly what he lacks. Therefore," exclaimed the gen- 
tleman, '' unless you can show how the laborer can be put into 
possession of something to give in exchange for the wealth he 
desires, there is no feasible way by which society can economi- 
cally increase his income." Thus, by the logic of his position, 
my friend was forced into the vicious circle where he finally was 
compelled to exclaim : " There is no way by which society can 
increase wages ; that question must be left to settle itself by 
natural law." Consequently, like most of the leading economists 
of the present century, he was compelled to assume the negative, 
pessimistic position of laissez-faire^ and, in spite of himself, 
become an ardent free-trader, though very desirous of being a 
social reformer. 

The intellectual quagmire into which this argument leads is 
due to the mistaken definition of " demand. It is a radical error 
to regard demand and supply as identical phenomena, and 
assume " that demand can only be increased by increasing the 
quantity of commodities offered for sale." As a matter of fact, 
not one tenth of the world's demand consists in " commodities 
offered for sale." The great market of the modern world is 
made by the daily wants of the people who have practically no 
commodities to offer for sale. All they have to offer for sale is 
service, and it is with that they purchase. When we once recog- 
nize the fact that all exchanges are ultimately the exchange of 
wealth for service, and not wealth for wealth, this matter assumes 



I 



DEMAND THE CAUSE OF SUPPLY. Ill 

a new aspect and the pessimistic vicious circle disappears. In- 
stead of saying that all demand for commodities is the supply of 
commodities offered for sale, we shall then say : the demand for 
commodities is the desire to consume them, coupled with the supply of 
service necessary to produce their equivalent. 

From this view there is no difficulty in seeing how the demand 
may be increased, and, through it, the supply enlarged. It is 
undoubtedly true that demand and supply are closely related 
and interdependent, but they are not identical phenomena. The 
distinction and economic relation of demand and supply will be 
greatly simplified if we keep two obvious facts in mind, namely : 
that no matter how complex the relations, or how involved the 
phenomena, demand always means want — consumption, and supply 
means service — production. 

Although Bastiat's statement of " wants, effort, and satisfaction" 
is correct, it should be remembered that the first two only are 
active forces. The first represents the active feeling or motive ; 
the second, the effort or action. The third is simply the result 
of these ; it is the actualization of the first, of which the second 
is the means. To-day's wants determine to-morrow's efforts, and 
yesterday's actual consumption determines to-day's actual pro- 
duction. Clearly, then, consumption is not only potentially prior 
to, but it is actually the cause of production. Since consumption 
constitutes the actual demand, and production the actual supply, 
it follows that demand is the cause of supply. 

There is no more obvious fact in economic experience than 
that supply follows the line of, adapts itself to, and finally de- 
pends upon, demand. This is why mankind always lives from 
hand to mouth, as it were, and society can never be made to per- 
manently produce more than will supply the normal current de- 
mand in any state of civilization. Indeed, were it otherwise, 
industrial depressions would increase instead of social welfare 
being promoted. It is for this reason that nothing can per- 
manently increase the quantity and reduce the cost of wealth 
which does not multiply the wants, enlarge the consumption, and 
therefore expand the social character of the people. 

The way in which demand exercises its controlling influence 
over supply is through the instrumentality of value or price. 
Upon the same principle that man will not give something for 



112 JIOW PI? ICE ARISES. 

nothing, he will refuse to supply the wants or demands of others 
except on the conditions that he obtains an equivalent in return. 
It is only when the demand is strong enough to induce the giving 
of full equivalents for the efforts of production, — i.e., sl price 
equal to the cost — that a continuous supply will be forthcoming. 
Supply, then, not only depends upon demand, but it depends upon 
demand at a certain price. Demand really creates the price, and 
the price induces the supply. 

In order to more clearly see the economic relation of these 
phenomena, let us suppose the existence of a community where 
the division of labor and exchange have not yet made their ap- 
pearance ; where there is neither buying, selling, nor barter. 
Here demand and supply, exchange and value, are unknown ; 
every one supplies his own needs by his own personal efforts. 
Let us further suppose that some one person in this community, 
more ingenious than the rest, contrives to make a bow and arrow, 
by the aid of which he is soon able to procure more game in one 
day than he previously could in three or four. No sooner has 
the advantage of this new weapon become known than others 
want it. How to obtain bows and arrows is now the question, 
and the price-creating forces at once begin to operate. Since 
the advantage of the new instrument in getting a living is so 
great, all who are unable to make it for themselves are willing to 
give something to obtain one from others. Here the want begins 
to assume the form of an economic demand, and price emerges. 
How much will he give ? A deer is offered for the bow and 
arrow. Whether the offer is accepted or not, the bow and arrow 
now have a price. It is one deer, but this is not enough. The 
maker of the bow and arrow can obtain more game by hunting 
with his new weapon than by staying at home and selling it for 
one deer. Hence he declines to make them and there is no 
supply. Two deer are offered, but he declines for the same 
reason, and still there is no supply, — although the price has 
doubled through the strength of the demand. Two deer and a 
beaver are offered ; here the bow- and- arrow-maker yields, and 
the supply commences. At this price those who have the apti- 
tude for making bows and arrows are willing to stay at home 
and make them, because they can obtain as much, or more, game 
in exchange for their weapons than by hunting for themselves. 



WHEN SUPPLY BEGINS. II3 

It will thus be seen that bows and arrows not only had a price 
long before there was any supply, but it was only when the price 
rose to the economic, or remunerative, point that the supply 
commenced and the ratio between demand and supply had any 
existence. Manifestly, the first fact in the movement of these 
phenomena was the demand for the game. When the bow and 
arrow was known to be capable of aiding in the gratification of 
this demand the desire for venison was extended to the bow and 
arrow also, and the amount that was offered for it was deter- 
mined entirely by the strength of the desire ; and this price, 
— when it became large enough to make it more profitable to 
manufacture bows and arrows than to hunt for a living, — was 
the sole cause of the weapons being supplied. It is therefore 
obvious that the price of the bows and arrows was not created 
by the ratio between the demand and the supply. 

This principle obtains with the same force in the most com- 
plex business transactions of modern society as in the most 
primitive stages, although its origin and operations are not so 
easily observed. It is true that an article sometimes is produced 
before there is any demand for it, i.e., before its utility is gen- 
erally known — but this does not alter the case. When a com- 
modity is supplied in advance of the demand for it, the supply 
is impelled by the same cause as when it is produced in response 
to a known demand, the only difference being in the certainty of 
the result. In the former case the supply of the article is based 
upon confidence in its capacity to serve some purpose to the 
community sufficiently well to induce willingness to give a 
remunerating price for it. If the utility of the article and the 
wants of the people have been correctly estimated, a remunerative 
price-making demand for it will ensue as soon as its merits are 
known. But, on the other hand, if the relative degree of these 
influences has been miscalculated, no effectual demand for it will 
arise, in which case the production will prove to be an entire 
mistake, resulting in loss to those who undertake it. This has 
been painfully illustrated in thousands of instances, — as the 
almost interminable list of unsuccessful patents clearly shows. 
Hence, whether the demand and supply commence to operate 
in their natural order, from the known utility of the article, — 
as in the case of the bow and arrow, — or in anticipation of it, — 



114 ORDER OF PRICE PHENOMENA, 

as in the case of the patents, — makes no real difference. In 
both cases the result is governed by the same law. 

Evidently, the more closely we examine the economic relation 
of demand and supply, the clearer it becomes that demand is 
the active force, to which supply is but the ultimate response. 
And that, to the extent supply exists without demand, is it 
devoid of social utility and economic force. In other words, 
products become waste or wealth in proportion as they pre- 
cede, or are preceded by, wants. Therefore, instead of economic 
prices being dependent upon the ratio between the demand and 
the supply, they have no necessary relation to it. The order of 
the economic relation of these phenomena is that supply imme- 
diately depends upon the price, and the price is created by the demand, 
and the demand depends entirely upon the habitual wants or social 
life and character of the people. 



i 



CHAPTER IV. 
THE LAW OF ECONOMIC PRICES. 

Section I. — TJie Scope and Importance of the Subject. 

The law of prices may be said to occupy the keystone position 
in the arch of economic science. It involves the principle upon 
which the equity of all human relations finally rests. All the 
advantages of social intercourse, however simple or complex, 
ultimately depend upon the exchange of equivalents. This is as 
true in the realm of the affections, ideas, ethics, and politics, as 
it is in economics. If all could secure the equivalent for what 
they give, they would receive an absolutely equitable reward for 
what they do, and injustice would be impossible. All industrial 
political, moral, or religious endeavor to improve society being 
efforts to promote justice, it must rest finally upon the principle 
involved in the law of economic prices, namely, quid pro quo. 
Nothing is truly economic which is not entirely equitable, and 
equity is the highest form of ethics. 

The phenomena that are subject to the law of prices may be 
grouped under two general heads, as wealth and service. 
There can be no economic change in society except through the 
alteration of the ratio in which these exchange for each other. 
The prices of wealth and service move inversely to each other, 
promoting social welfare only as the ratio in which wealth will 
exchange for service increases. Since all economic exchanges 
are of the same general character and belong to the same class of 
phenomena, they must be subject to the same general law. Conse- 
quently, to explain the law of prices is to furnish a clue to the 
law of wages, rent, interest, and profit, and really to lay the founda- 
tion for a scientific solution of the whole problem of Economic 
Distribution. 

"5 



Il6 ECONOMIC LAW. 

At the outset we must remember that we are not seeking the 
explanation of some special cases of exchange, but we are seek- 
ing the law to which all exchange may be referred, and through 
which all prices may be adequately accounted for. 

The true theory of economic prices must be capable of explain- 
ing why the price of agricultural products tends to conform to 
the ratio of demand and supply, while that of manufactured 
products does not ; and why the price of labor rises when the 
supply is in excess of the demand ; why the price of certain 
agricultural and dairy products constantly tends to rise, while 
that of manufactured products tends to fall ; and why this dis- 
parity in the permanent tendency of prices in these classes of 
commodities is the greatest in the most highly civilized countries. 
In short, it must be capable of explaining the variation in the 
economic prices of all kinds of commodities and service under 
all conditions. 

Section II. — The Meaning of Economic Law. 

It is important, in this connection, clearly to define in what 
sense the word law is to be understood in Economic Science. 
We frequently hear the expressions natural law and artificial law 
— as if the phenomena created by art were unnatural, — the impli- 
cation being that nothing is natural except what results from the 
unaided forces of nature. This erroneous notion is the basis of 
much of the unscientific conduct of the laissez-faire doctrinaires. 
Upon the assumption that natural law means the uncontrolled 
operation of cosmic forces, they conclude that " natural law " 
can only prevail in commerce and industry under a laissezfaire 
regime. It is difficult to conceive a notion more unscientific. All 
laws are natural. Unnatural law in the scientific sense is a 
contradiction in terms. 

Law in science simply means the necessary order in which 
phenomena succeed each other as cause and effect. A law is not 
more or less natural because its operation results from cosmic or 
from human influences, nor because its effects are good or bad. 
Almost every thing that will preserve life under certain con- 
ditions, will just as surely destroy it under others, and the law is 
equally natural in both cases. In seeking a scientific law, there- 



CHARACTER OF ECONOMIC SCIENCE. 11/ 

fore, it is not a question of distinguishing the natural law from 
the artificial law, but solely one of ascertaining the necessary 
order in which phenomena lead to given results, and the con- 
ditions which favor or retard that order of movement. Under- 
standing this, we shall be in a position to act scientifically 
regarding the influences that aid the recurrence of desirable, and 
prevent that of undesirable, phenomena. 

Since the advancement of social welfare primarily depends 
upon cheapening wealth, it is one of the chief functions of 
economic science to explain how a smaller amount of labor can 
become the equivalent of a larger amount of wealth. In study- 
ing the law of prices, therefore, our chief concern is to ascertain 
the order of economic phenomena which makes given quantities 
of wealth and service the economic equivalents of each other. 
When this law is clearly established we shall have a scientific basis 
for industrial development, and instead of having to take refuge 
behind the doctrine of laissez-faire to protect us from the irra- 
tional hit-or-miss policy which has characterized so much of 
modern statesmanship, we shall be able to increase the influences 
which promote, and diminish those which retard, industrial and 
social progress, with the same scientific accuracy that we can now 
travel by steam and communicate by electricity. 

This does not mean that economic science is of the same exact 
character as mathematics or chemistry. The phenomena with 
which it deals do not admit of the same exact statement, for two 
reasons : first, because the change that is constantly taking place 
in social phenomena is so universal and persistent that in no two 
succeeding instances are the phenomena exactly the same ; and 
second, because much of the change in this class of phenomena 
is due to human desire and human will, neither of which admits of 
exact quantitative statement. Although economic phenomena 
are not susceptible of being reduced to exact mathematical state- 
ment, they are susceptible of positive explanation. Economic 
science deals with the social relations of the human race, and the 
law of their continuous development. Since social progress is an 
almost imperceptible evolution, it is more necessary that knowl- 
edge regarding the tendency of phenomena should be exact than 
that the precise quantitative relations should be known at any 
given time. 



Il8 THE LAW OF TENDENCIES. 

In economics, then, the term law must be understood as 
expressing the order in which phenomena necessarily tend to 
move in any given direction. Hence, in studying the law of 
economic prices, we must endeavor to ascertain, first of all, the 
necessary tendency of economic prices, and how that tendency is 
determined. When the primary law of economic tendency is 
clearly established, the action of the secondary influences, which 
tend to modify its operation, can be ascertained with comparative 
ease and accuracy. We shall then be in a position to distinguish 
the economic tendency from its uneconomic perturbations. The 
law of the first will of necessity furnish the key to the second, 
because to know the one is, by implication, to know the other. 

Section III. — The Primary Law of Prices. 

It is a characteristic of all phenomena with which science has 
yet been able to deal, that their actual movement is governed by 
a composite law, resulting from a variety of forces which act and 
react upon and modify each other. This is especially true of 
economic and social phenomena. These forces may be divided 
into two classes : as primary and secondary forces. The former 
determines the constant tendency of the main current ; the latter 
affects the rate of movement, and hences modifies the quantita- 
tive result at any given time. Thus, for example, in gravitation 
the primary forces attract bodies towards each other directly in 
proportion to the quantity of matter which they contain ; but this 
movement is modified by the secondary forces, which diminish 
the power of attraction as the distance increases. Consequently, 
until the relative influence of these two classes of forces was 
accurately ascertained, the actual movement and relative position 
of bodies under given conditions could not be correctly predi- 
cated. Hence, in stating the actual law of gravitation, we express 
the action of both these forces and say : '^ All bodies are attracted 
to each other directly in proportion to their size and inversely to 
the square of their distance." So it is in the sphere of economic 
prices. While the order and direction of economic movement is 
determined by the direct action of the primary forces, the degree 
is modified by the secondary forces, and the result at any given 
time cannot be correctly predicated unless the relative power of 



ECONOMIC MOVEMENT OF PRICE. 1 19 

the secondary to the primary forces is accurately known. There- 
fore, correctly to understand the scientific law of economic prices, 
we must first ascertain the primary law of price-determining phe- 
nomena, and then consider the modifying influence of secondary 
forces and the degree to which they operate in determining the 
actual ratio of exchange. 

In order clearly to observe the action of the primary forces 
upon the tendency of prices we must eliminate all secondary in- 
fluences from the problem. To do this we must assume that all 
who participate in a transaction are adequately informed as to the 
quantity, quality, and other conditions affecting the commodity 
for which they are negotiating ; and also that they are entirely 
free to act according to their best interest and judgment. More- 
over, to be sure that the movement is entirely economic, we must 
assume commodities whose production is wholly determined by 
economic forces, such, for instance, as manufactured products, 
leaving agricultural products, whose quantity and quality are 
largely influenced by gratuitous forces, to be considered later. 
How, then, upon the principle of self-interest and economic 
equity, is the price of a commodity determined ? 

Since the action of both producer and consumer is governed by 
the motive to obtain the greatest result for the least effort, it is 
quite clear that no exchange will take place unless each can 
obtain more gratification from what he receives than he could 
have procured from what he gives. Let us examine the economic 
movement under the simplest known conditions — namely, where 
man produces for his own personal consumption. The economic 
movement is as complete here as in transactions where thousands 
of miles and millions of people intervene between the producer 
and the consumer, the only difference being in its relative sim- 
plicity or complexity. If our isolated producer wants cotton 
cloth, the first question that arises is how to get it. That being 
settled, the next point in the problem is, will the gratification de- 
rived from the product be sufficient to compensate for the effort 
necessary to obtain it ? If it will, the cloth will be made ; if not, 
the enterprise will be abandoned. 

In modern society where, through the division and specializa- 
tion of labor, all produce for others and receive what they actually 
consume through exchange, the principle is the same, though the 



I20 BASIS OF ECONOMIC EQUALITY, 

process is more complex. When making cotton cloth for a stran- 
ger, it is essentially the same question which arises as when mak- 
ing it for one's self, namely : can the producer, in exchange for 
the cloth, obtain as much utility as it cost in painful effort, or as 
he could otherwise have obtained by the expenditure of the 
same amount of energy ? If not, the cloth will not be made. Ob- 
viously, therefore, the first condition necessary to secure the pro- 
duction of cotton cloth is that the consumer shall be willing to give 
an economic equivalent for it. Economic equivalents, as already 
explained, are not necessarily equivalents of utility. The utility 
of an article may differ with different persons according to tem- 
perament, taste, intensity of desire, and other conditions peculiar 
to the individual, but that does not affect it as an economic qual-. 
ity. The fact that an eastern manufacturer can obtain twice as 
much gratification from a bushel of wheat as from ten yards of 
cotton cloth, while a western farmer could only get one tenth 
more gratification from the cloth than from the wheat, does not 
prevent the wheat and the cloth from being economic equiva- 
lents. Of course the farmer will not give the wheat for the cloth 
unless it has more utility for him than has the wheat, but the fact 
that it would possess twenty times as much utility for the manu-- 
facturer would not affect the economic relation of the producers. 
The economic equality of commodities does not depend upon 
the equality of the utility, but upon the equality in the amount 
of reluctant productive energy expended in procuring them — in 
other words, the necessary cost of production. Clearly, then, the 
minimum price at which the cloth can be obtained is determined 
by the producer, and it is fixed at a point equal to the cost of its 
production. For the same reason that the minimum price is 
determined by the producer, the maximum price will be deter- 
mined by the consumer. What, then, under these conditions^ 
will the maximum price be ? Since the producer will not permrj 
the consumer to obtain the cloth for less than it cost, will the 
consumer permit the producer to obtain more for it than it cost 

It must be remembered that the motives which influence the 
producer to refuse to supply the cloth for less than it cost oper^ 
ate with equal force to make the consumer decline to give more 
than it cost. Unless there is some ethical or economic reasoi 
why the consumer should give more for the cloth than the equiva* 



COST THE BASIS OF PRICE. 121 

lent of its cost, he certainly will not do so. There is manifestly 
no good reason for compelling the consumer to give more for an 
article than its equivalent, since to do so would be to receive less 
— an obvious violation of the principles of equity. The ethics of 
economic exchange are : quid pro quo, — price, the exact equiva- 
lent of the cost. 

Nor is there any economic reason why this should be other- 
wise. If the consumer demands the cloth for less than it cost — 
i.e., for a smaller amount of wheat, shoes, or other products, 
than its economic equivalent, the manufacturer has an effective 
remedy at hand, namely : to refuse to make the cloth and devote 
his energies to producing the wheat or shoes for himself. On the 
other hand, the consumer of cotton cloth, who is a producer of 
other things, has an equally effective means of protecting himself 
against the encroachments of the producer. If the manufacturer 
demands more wheat or shoes for his cloth than its economic 
equivalent, the consumer of cloth can, and unquestionably will, 
refuse to furnish wheat or shoes and devote his energies to 
making cloth. And all the power which the producer pos- 
sesses for preventing the price of cloth from falling below the 
cost of its production, the consumer has in an equal degree to 
prevent it from rising above the cost of production. Therefore, 
upon the principle that two equal opposing forces neutralize 
each other, the consumer cannot force the price below, and the 
I producer cannot force it above, the cost ; consequently this is the 
. only .point at which the exchange can take place. In a word, it 
' is the only point at which all exchanges become economic and 
t mutually advantageous, and at which everybody obtains an 
: increase of utility by giving an economic equivalent, 
i Moreover, if there were any economic force by which the pro- 
'ducer could exact more than he gives, it would be neutralized by 
the consumer in his capacity as a producer, and again reduce the 
relation of the producer and the consumer to a purely economic 
Icost basis. It will thus be seen that, in the absence of secondary 
;md modifying influences (hereafter to be considered), the primary 
\ aw of economic prices is, that commodities exchange in the ratio 
Ipf the cost of their production. 

It may be well to pause here a moment to explain precisely 
vhat is meant by the expression, "cost of production." The 



122 COST OF PRODUCTION DEFINED, 

cost of a commodity is simply what its owner gave for it, or must 
give to replace it The aggregate cost of producing cotton cloth 
may be divided into three items-: cost of service, cost of raw ma- 
terial, and cost of tools. Under existing methods all whose 
services are found necessary to the manufacture of cotton cloth 
are included in the cost of service, or labor. All classes of labor 
must, for the reasons already stated, receive as much from the 
enterprise as they put into it, or they will devote their energies in 
some other direction. What the laborers put in is their whole 
working force ; the cost of their working force to them is their 
living — whatever that may be, — and that they must have in order 
to be able to continue to supply their productive energy. This 
cost of service will vary according to what enters into the living. 
In one case it may be a dollar a day ; in another, ten or twenty 
dollars a day. What determines that difference will be con- 
sidered under the head of wages. It is sufficient for our present 
purpose that each class of service must receive from the product 
the equivalent of its cost ; none can obtain more, because none 
will accept less. 

The same is true of raw material. If we follow -the history of 
its cost we shall find that it is again resolved into the same three 
classes of cost, and, in the last analysis, they will all prove to be 
the cost of labor. We will assume that all previous demands in 
producing the raw material have been settled, and therefore its 
cost is represented in what the manufacturer has to give for it. 
For the same reason that the laborer must receive the equivalent 
of the cost of his labor, the manufacturer must obtain from the 
product the equivalent of the cost of the raw material. And he 
cannot obtain more than the cost, because to do so would be to 
take something for nothing, and to this nobody will consent. 
The same is true of tools and implements. The wear and tear 
of tools and machinery must be replaced from what is received 
for the product, or they would soon disappear. Less than the 
equivalent of this the owner will not accept, and more the con- 
sumer will not give. Now, what is true of service, raw material 
and tools separately is equally true of them collectively. For the 
same reason that each of these must receive the equivalent 
what is expended, the producer or owner of the finished producj 
will not accept less, and cannot obtain more than the equivaleni 



THE PRICE-FIXING INCREMENT. 1 23 

of its aggregate cost. In other words, the cost of manufacturing 
cotton cloth is increased by exactly the amount that each of these 
three factors impart to it, and the ratio in which it will exchange 
for other commodities and service — /. e., its value — must, and will 
be, exactly equal to what will replace them or their equivalents. 
The question of profits is naturally suggested here, but in order 
to keep the primary movement of price-regulating phenomena 
unobscured, the consideration of that subject will be deferred to 
a subsequent chapter.^ At the price-determining point of the 
economic relations which we are now considering there is no 
profit and can be none. It may be remarked in passing, however, 
that it is a great mistake to confound the manufacturer or 
entrepreneur's income with profits. Profit, as we shall hereafter 
see, is the net surplus which is left after all the factors have re- 
ceived a full economic equivalent for their contribution to the 
product. Unless such an economic margin can be found, the 
socialist's claim that profit is robbery must be correct. That 
such a surplus is possible and does exist we shall subsequently 
see ; and exactly how it takes place, on the basis of the economic 
equivalents and absolute equity, the law we are considering will 
adequately explain, if our hypothesis is correct. For the present 
we are concerned only with the purely price-making point of 
economic conditions. 

Since no factor will contribute something for nothing, the 
manufacturer must, and will, receive an equivalent for his contri- 
bution to the product. His reward takes the form of a salary 
for superintendence, — which is a necessary part of the cost, 
just as much as that of the clerk, or the wages of the spinner and 
weaver. 

But what, it may be asked, under these conditions is the return 
for the use of pure capital. Capital receives exactly the same 
kind of reward as every other factor, namely, the equivalent of 
its cost. It gets back all that it gives, or an equivalent for it. If 
any of the factors are governed by law, they must all be subject 
to the same law. If one can obtain more than it gives, they all 
can. This principle becomes quite clear if we once recognize 
the fact that gratuitous forces of nature charge nothing for their 
contribution of productive energy. For the same reason that air 
^ Part III., chapter iv. 



124 EQUITY OF ECONOMIC LAW, 

and sunlight have no price because they cost nothing, do pro- 
ducts which possess utiUty have a price only because they cost 
something, and the price is commensurate to the cost. Every 
improved machine which diminishes the cost of production, to 
that extent approximates gratuitous natural forces, and nothing 
can be demanded for that part of the product. 

If the improvements should reduce the cost of making cotton 
cloth by a cent a yard (since 1820 it has reduced the cost more 
than ten cents a yard) such reduction would be exactly as if one 
quarter of the cloth had been supplied gratuitously by nature. 
Capital, whose sole function is to aid and save labor, really sus- 
tains the same economic relation to production that natural 
forces do. Indeed, it only succeeds in economizing labor when 
it substitutes the use of natural forces for human energy. All 
the wealth that is thus produced is free, and no price can be 
charged for it. The difference in the cost resulting from the 
improvement, through the automatic operation of economic law 
passes to the consumer by a reduction of the price. This is why 
improved methods of production cheapen wealth. 

Under conditions of uniform cost of production, therefore, 
with free economic movement and adequate knowledge of the 
phenomena, the price and cost of a commodity would be identi- 
cal. In other words, the primary law of prices, in the absence 
of secondary modifying influences, is, that commodities and ser- 
vices exchange in the quantitative ratio of exact economic 
equivalents ; and, consequently, unimpeded economic law estab- 
lishes exact industrial equity, or absolute justice. 

It will be observed that thus far we have considered the move- 
ment of prices only under purely hypothetical conditions, namely, 
where the product is made at a uniform cost. As a matter of 
fact, there is probably no commodity, in the production of which 
capital is employed, which is not produced at a great variety of 
costs ; hence no hypothesis can adequately explain the law of 
prices which is not applicable to conditions of varying costs of 
production. We will therefore consider the subject in its most 
complex aspect, where the cost of making the same article varies. 
In order to do this, we will suppose that there are six (there may 
be six hundred) manufacturers, or groups of manufacturers, who 
produce the same grade of cotton cloth and sell it in the same 



i 



HIGHEST COST EQUALS LOWEST PRICE. 12$ 

market. And let us further suppose (what actually exists on 
every hand) that, from various causes, such as different degrees 
of skill, quantity of capital, quality of machinery, size of plant, 
location, etc., the actual cost of making the cloth and delivering 
it to the market is slightly different in each case. For example, 
suppose that A, who for some reason produces under the great- 
est disadvantage, can barely make print cloth of 64 x 64 quality 
at 4 cents a yard ; that B, through some economic advantage 
derived from larger capital, better location, superior manage- 
ment, etc., can produce the same cloth at 3^ a yard ; C, at i\ ; 
D, at 3f ; E, at 3^ ; and F, at 3 cents a yard. 

Now, according to the law just stated, what will be the price 
of the cloth under these conditions ? In the case where the cost 
of production was uniform we saw that the price was equal to the 
cost, but here we have six lots of the same commodity each 
produced at a different cost. For reasons already stated, the self- 
interest of both consumers and producers would make it impos- 
sible for the cloth to be sold at six different prices in the same 
market. The lowest price at which any producer will sell will be 
the highest at which consumers will buy ; and conversely, the 
highest price the consumers will give will be the lowest any pro- 
ducer will take. If the minimum price is fixed by the producer 
at cost, and the producer's minimum is the consumer's maximum, 
the price must still be fixed at the cost ; and if, as is generally 
admitted, there cannot be two prices in the same market, then 
the price of the whole must necessarily be determined by the 
cost of some one of the six classes of producers. Which of them 
occupies that price-making position ? 

While the producer will not sell below cost, he will sell at any 
price from that point upwards, and he will only consent to sell at 
cost when the consumer refuses to buy at a price above it. 
Through the efforts of consumers to buy at the minimum, and 
their refusal to buy above the cost, the price will be forced down 
until it reaches the cost. Since the cost of A's cloth is the high- 
est it will, of course, be the first to be reached. Therefore the 
downward movement of the price must necessarily be arrested at 
the cost of A's cloth, if his product is to be sold. Since to make 
his portion of the product costs 4 cents a yard, so far as he is 
concerned, that is the equivalent of the cloth, and must be the 



126 



ORIGIN OF PROFITS. 



minimum price. On the other hand, the consumer will not give 
more than 4 cents a yard, for the obvious reason that B, who can 
make it for 3^ cents a yard, though anxious to get more, would 
willingly take 4 cents and make i of a cent profit, rather than 
not sell. So long as the consumer can obtain it from B for 4 
cents a yard, he certainly will not give more than that for it to A. 
Therefore, 4 cents a yard is both the lowest A can afford to take, 
and the highest he can possibly get for his cloth. 

It will be observed that A is here in exactly the same position 
that the producer was in the former case, where all the product 
was made at a uniform cost, namely : that he can neither accept 
less nor obtain more than the equivalent of the cost. Manifestly 
what A must have for his cloth all the others can have for theirs, 
and 4 cents a yard will be the selling price of the whole product 
in that market. Under these conditions, then, A will sell exactly 
at cost. He will give and receive exactly quid pro quo and have 
no surplus or profit whatever. All the other five being able to 
sell their product at the same price as A, while producing it at 
less cost, can give the same equivalent for what they get and 
still have a surplus equal to the amount by which their cost of 
production is less than his. Here profit emerges, and the relative 
position of the various groups of producers will be as follows : 



M anu f acturer s . 


Cost per yard. 


Price per yard. 


Surplus profit 
per yard. 


Total profit 
per 1,000 yards. 


A 


4 cts. 


4 cts. 


— cts. 


— 


B 


3f 


4 


\ 


$2.00 


C 


31 


4 


f 


4.00 


D 


3f 


4 


f 


6.00 


E 


3i 


4 


f 


8.00 


F 


3 


4 


I 


10.00 



It will be observed that two movements are here indicated : 
one of price, the other of cost. Under conditions where different 
portions of the general supply are produced at a different cost per 
unit (as in all civilized communities), one of two things must 
occur : either the selling price must vary with the variation of 
cost, or a surplus equal to the difference must arise. Since the 
self-interest of both consumers and producers operates to make 



EQUITABLE BASIS OF PROFITS. 12/ 

prices tend to a uniformity in the same market, a surplus equal 
to the difference in the cost is inevitable. Nor is there any 
violation of ethics in either case. The uniformity of prices is 
strictly equitable, because each producer gives to the consumer 
the full equivalent of what he receives. The only reason that the 
producer of other commodities will give 4 cents, or its equiva- 
lent, to A for his cloth is, because they could not produce it for 
less if they devoted their energies and capital to the business. 
Therefore a yard of cloth to them is the exact equivalent of 4 
cents. If, then, a yard of A's cloth is an equivalent for 4 cents, 
that of B, and all the others, must be equally so, because it is 
just like it. 

Manifestly B, C, D, E, and F give just as complete an equiva- 
lent for what they get as does A. Hence the surplus is not 
obtained at the expense of equity. They pay the same wages 
and fulfil all the other economic requirements just as completely 
as does A, or as do the shoemakers or farmers with whom they 
trade. Their profits are due entirely to influences peculiar 
to them, and come from nature through them, and not from the 
consumer or laborer through injustice. Just as soon as the 
peculiar skill, or other means, by which B makes nature give him 
^ of a cent a yard surplus, becomes accessible to the shoe- 
maker or farmer, so that by the application of the same amount 
of capital and labor they can produce the cloth at 3I-, it will 
cease to be an equivalent to them for 4 cents. They will then 
refuse to give 4 cents for it, — for the same reason that they pre- 
viously refused to give 4^. When that point is reached, rather 
than give 4 cents to A, they will withdraw their capital from 
shoemaking or farming and make cotton cloth, and A will have 
to leave the business unless he can adopt the superior methods 
employed by B, because he will have ceased to give an equivalent 
for 4 cents. The price of the cloth will then be 3I- cents a 
yard, consequently B will have no profit, and the profit of all the 
others will be reduced by -g^ of a cent a yard. That is exactly 
the way the price of cotton cloth has been reduced from 30 to 4 
cents during the present century. 

What is true of cotton cloth and other manufactured articles, 
the production of which is entirely subject to economic and social 
forces, i.e.y the conscious effort of man — is equally true of agri- 



128 PRIMARY LAW OF PRICE STATED. 

cultural products — whose production is largely influenced by un- 
conscious cosmic forces. The reason the economic price of 
manufactured products does not necessarily follow supply and 
demand is because, in their case, an increase or diminution of 
the quantity does not necessarily affect the cost of production, or, 
if at all, but slightly. Conversely, the economic price of agri- 
cultural products does follow demand and supply because, in 
their case, an increase or diminution of the quantity — being 
chiefly due to the condition of the seasons — implies a similar 
change in the cost per unit. 

We are now in a position to aflirm four important postulates 
from which the primary law of prices can be definitely stated. 
(i) That under conditions of economic freedom, the general 
price for any given article in the same market tends to uniform- 
ity. (2) That, when the general supply of a commodity in any 
market is produced at a uniform expense per unit, the selling 
price will be the exact equivalent of the cost, and no surplus will 
exist. (3) That, where v^er the aggregate supply of a given com- 
modity is produced at different rates of cost per unit, the price 
will tend to a uniformity on the basis of the cost of those units 
which are produced at the greatest expense, (4) That a surplus, 
or profit, arises inversely to the cost of producing the different 
parts of the necessary supply, increasing as the cost diminishes 
below that of the most expensive, or price-making, portion. 

Section IV. — Influences which Modify the Operation of the 
Pri^nary Law of Prices. 

In the preceding section we considered the movement of prices 
under purely economic conditions, namely : where cosmic 
forces did not influence production, except as consciously 
manipulated by man, and where both buyer and seller had the 
right and power to act in accordance with their own interests and 
best judgment, with adequate knowledge of the conditions affect- 
ing the commodity. We have seen that, under these conditions, 
there can be but one price for the same article in the same mar- 
ket, — which price will be the exact equivalent of the cost of 
producing the most expensive portion of the necessary supply in 
that market. 



PRICE VARIATIONS. 1 29 

In actual experience, however, we find that these conditions 
do not literally fit the facts. We know that there frequently is 
more than one price for the same article in the same market, and 
also that commodities are sometimes sold below the cost of pro- 
ducing the dearest portion, and also below that of any portion of 
the supply. Consequently, if the primary law formulated in the 
previous section is correct, we must be able to explain in accord- 
ance therewith why and how this variation takes place, and 
whether it is an uneconomic perturbation which should be elimi- 
nated, or an economic variation which should be accepted and 
counted upon. Whenever there are two prices for the same 
article in the same market, it is manifest that either some consum- 
ers are giving more, or some producers are selling at less, than 
the cost. The exchange, under these conditions, is against the 
interest of one or the other of the contracting parties. Another 
fact, which is equally self-evident, is that neither the producer 
nor the consumer v/ill do that which is inimical to his interest if 
he knows it and is free to prevent it. Therefore, whenever there 
is more than one price for the same article in the same market, it 
must be because the party giving more or taking less than the 
cost is either ignorant of the facts or is not free to act in accord- 
ance with his knowledge and interest. For example, to recur to 
our previous illustration, suppose the supply of cotton cloth, the 
dearest portion of which cost 4 cents a yard, is sold by one 
producer at 4 cents a yard, and by another at 5 cents. It is 
very clear that the purchaser who gives 5 cents a yard would 
not do so if he knew that he could just as easily obtain it for 
4 cents. Therefore when he gives 5 cents it must of necessity 
be either because he does not know that it can be obtained 
for 4 cents, or that he is induced to believe that it is of a 
better quality than that which is sold at 4 cents, or else because 
his right, to purchase from the 4-cent dealer is restricted. On 
the other hand, if the prices vary in the same market through 
the producer selling at less than cost, as is not infrequently the 
case, that too must be the result of similar causes. To sell for 
less than cost is to lose ; and to continuously do that willingly is 
to voluntarily become bankrupt, — a course too absurd for sane 
people to pursue. Whenever a dealer sells at a loss, it must be 
because ; (r) that he either does not know at the time what' his 
9 



130 PRICES TEND TO UNIFORMITY. 

goods cost him, or what it would cost him to replace them ; (2) 
that he did not know when he purchased them at what price he 
would have to sell them ; (3) that he miscalculated his own 
necessary cost in handling them ; (4) that he offers them for 
less than cost in order to attract customers to his place of busi- 
ness in the hope of selling them other commodities at an over- 
charge equal to or greater than his undercharge ; (5) that he is 
compelled to sell at a loss in order to meet urgent demands of 
previous indebtedness ; (6) that he is uneconomically handi- 
capped by arbitrary authority. 

It will readily be seen that, in the absence of all these condi- 
tions, the consumer would not give more nor the producer take 
less than the cost, and the price would be governed by the pri- 
mary law formulated in the last section. It will also be observed 
that the changes of price from these causes are not economic 
variations, but that they are all uneconomic perturbations. That 
is to say, they are fluctuations from the economic price, and are 
always exchanges in which one gets more, or the other less, 
than an equivalent. That these perturbations are due to the 
causes here indicated is clearly shown by the fact that they are 
greater in the retail than in the wholesale market, and greatest of 
all in those sections of the retail market where poverty and 
ignorance are most prevalent. The obvious reason for this is 
that in such localities the average consumer is more ignorant, and 
therefore more easily imposed upon, both as to the price and the 
quality of the commodities. He is also often under pecuniary 
obligations to the merchant, and therefore less free to trade else- 
where. It will also be found that in these sections of the com- 
munity the greatest amount of misrepresentation as to the quality 
of goods prevails. Among retailers who sell to the more intelli- 
gent and characterful customers this variation diminishes, and 
the same articles are sold at a more uniform price. This is 
inevitable for two reasons. First, because the fraudulent element 
is largely eliminated through the impossibiUty of imposing upon 
the consumers as to the quality ; and second, because the pre- 
vailing prices at the various stores are more generally known to 
the consumer. If we go to the wholesale markets, where the 
prices, quality, and cost are still more correctly known by the 
purchaser, we find almost no variation in the price for the same 



ACTUAL LAW OF PRICES. I3I 

article in the same market at the same time, the only difference 
being in the discount to purchasers of larger quantities, which is 
a purely economic transaction, it being possible to handle large 
quantities at a lower cost per unit than small quantities. It will 
thus be seen that, just in proportion as the causes of these un- 
economic perturbations are eliminated, the price tends to conform 
to the primary law. 

Since all these perturbations from the economic price involve 
loss to the producer or the consumer, according as it is above or 
below the cost, it follows that all the motives for human action 
will tend to influence both the consumer and the producer to 
avoid disadvantageous exchanges just as fast as they become in- 
formed of the fact. As soon as the consumer discovers that he 
is buying roasted peas for coffee, cotton for wool, or paper for 
leather, he will endeavor to trade where this fraud is not practised 
upon him. Accordingly, we find to-day that, in the best houses 
on Broadway, the reputation for integrity is an important feature 
of business success, while on Canal Street and the extreme east 
side, ethics in business is of no commercial importance. On the 
other hand, as soon as the producer discovers that he is selling at 
a loss — whether through a miscalculation of the market, a wrong 
estimate of his own expenses, a misrepresentation of the quality 
of the goods, or other cause, — he will retrace his steps and en- 
deavor to correct the error for the future ; and every correction 
of the error arising from any of these causes tends to bring him 
back to the position which he thought he occupied, namely : 
purchasing the genuine article at the minimum price. It is thus 
evident that the same influences which, under conditions of 
economic freedom, make prices equal the cost of production, will, 
under conditions of uneconomic perturbations, constantly force 
prices to tend towards that point. 

Therefore, the actual law of prices — the law to which the 
price of commodities and service constantly tends to conform 
— may be stated thus : the price of coiiimodities and service tends 
to adjust itself to the cost of producing the most expensive portion 
of the supply consumable in any given market, this tendency in- 
creasing in uniformity and persistence directly as the knowledge of 
economic phenomena and the freedom of the economic action are 
increased. 



132 I^ISE AND FALL OF PRICES, 

Section V. — Verification of the Economic Law of Prices. 

If this hypothesis is correct it will enable us to explain the 
price-movement of all classes of commodities and service with 
equal correctness. Will it stand the test ? 

For the purposes of verification price phenomena may be con- 
veniently grouped as follows ; (i) manufactured articles whose 
production is entirely subject to economic influences : (2) agri- 
cultural produce, which includes all classes of farm and garden 
products, fruits, etc., whose quantity and quality are largely effected 
by non-economic influences — /. ^., uncontrollable cosmic forces : 
(3) labor, or human service, which is chiefly affected by social 
influences. 

I. First, then, will this hypothesis account for the price-move- 
ment of manufactured commodities ? The history of the price 
of manufactured products in the wholesale market shows two 
characteristic facts. One is the constant tendency of prices to 
permanently fall with no disadvantage to the producer, and with- 
out any perceptible variation in the ratio of demand and supply. 
The other is a tendency to periodic " over-production," which, 
instead of permanently lowering prices proportionately to the 
relative over-supply, results in the closing of factories and of 
workshops, discharging labor, loss, bankruptcy, and other un- 
economic conditions. Both of these facts are adequately accounted 
for by our hypothesis. 

The reason that the price of manufactured products tends to 
permanently fall — with mutual advantage — is that the cost of 
producing the most expensive portion of the supply is gradually 
diminished through the concentration of capital and the use of 
improved methods of production, giving a larger aggregate product 
per unit of productive force. This theory affords an equally clear 
explanation of why loss and bankruptcy follow so-called over- 
production. It is because the increased supply involves a 
corresponding increase in the cost of productive force that no 
reduction in the price can be made without loss. Consequently 
one of two losing alternatives is inevitable, namely : either to sell 
at less than cost, or to suspend business. When, after disposing 
of the surplus through one or the other of these losing avenues, 
the normal process of production is again resumed, it must be at 



AGRICULTURAL PRICES. 1 33 

the prices which previously prevailed ; that is to say, the price of 
commodities must sustain the same ratio to that of labor as 
before, for the reason that no diminution in the cost, per 
unit of productive force, has taken place. Thus prices under 
both conditions obey the same law, namely : of constantly tending 
towards the cost of producing the most expensive portion of the supply. 
Any variation of prices contrary to this law involves economic 
loss and social disadvantage. 

2. The price-movement of agricultural products is quite differ- 
ent from that of manufactured articles, but, if examined in the 
light of this hypothesis, it will be found to follow exactly the 
same law. In manufactured commodities we have seen that the 
general tendency has been towards lower prices without loss ; 
and that periodic increase of production (over-production) fails 
to lower prices, except by loss and bankruptcy. In agriculture, 
these two facts are reversed. The general tendency of agri- 
cultural prices is to rise without increasing the profits, and the 
periodic increase of production (exceptionally large crops) lowers 
prices without loss. In other words, the general tendency of 
agricultural prices is to rise without any perceptible variation in 
the ratio of demand and supply, but in the yearly product prices 
rise and fall with the demand and supply ; nor is the reason for 
this hitherto unexplained phenomenon difficult to understand. 

The price of agricultural produce — especially meat, butter, 
poultry, and garden products — tends to rise for the reason that 
the cost of their production tends to increase. This is due to the 
obvious fact that the use of labor-saving methods has not reduced 
the cost of productive energy per unit as much as the general rise 
of wages has increased it, and consequently the net cost of pro- 
ducing the most expensive portion of the supply in agriculture 
has, in many instances, increased during the present century. 
Nor is the fact that agricultural prices tend, from year to year, to 
rise and fall with the variation in the demand and supply, less 
easy to explain. The reason for this is that the sudden increase 
in the supply is not accompanied, as in the case of manufactured 
\ products, with a corresponding increase in the cost. Hence, every 
I unit of product added to the crop diminishes the cost of every 
■' other unit. For example, if the normal wheat crop in 1889 were 
20 bushels per acre, and, through the influence of a favorable 



134 PRICES IN DIFFERENT COUNTRIES. 

season, the crop in 1890 should be 30 bushels per acre, each 
bushel in 1890 — with the exception of the items of harvesting, 
threshing, and transportation — would cost about one third less 
than in 1889. Therefore the price per bushel of that crop might 
fall about 25 per cent, without any injury to the farmer, because, 
with the exception of the items referred to, the 30 bushels in 1890 
did not cost any more than did the 20 bushels the previous year. 
The increased supply being chiefly gratuitous, it reduced the cost 
per bushel of the whole crop to that extent. This explains the 
fact, so common in the history of agriculture, that farmers often 
get as much for a small crop as for a large one. 

The increased or diminished quantity only affects the price 
through operating upon the cost. And the only reason why the 
price of shoes does not fall with the increased supply — without 
loss to the producer — and the price of wheat does, is because the 
increase in the supply of shoes does not diminish the cost of pro- 
ducing the shoes, while with every increase in the supply of the 
wheat the cost of its production is proportionately reduced. 
Therefore, while the price of agricultural products follows the 
variations of supply and demand, it is really governed by the 
same economic force as that of manufactured products, namely : 
the cost of producing the most expensive portion of the supply. 

Moreover, this hypothesis not only accounts for the disparity 
between the general movement of the prices of agricultural and 
manufactured products in civilized countries, but it also affords 
a rational explanation of why they practically move together in 
uncivilized countries. When we recognize the fact that the price 
of agricultural produce in civilized countries tends to rise, be- 
cause the general rise of wages has increased the cost of produc- 
tion more than the use of labor-saving methods has reduced it; 
and that the price of manufactured products tends to fall, because 
the use of labor-saving methods in their production has reduced 
the cost more than the general rise of wages has increased it, we 
have no difficulty in understanding why this disparity of move- 
ment does not exist in less civilized countries, where machinery 
is but slightly employed in either manufacture or agriculture. 

3. In the light of this theory the infinite variation in the price 
of labor, which has hitherto been an economic enigma, at once 
assumes a rational aspect and obeys the orderly operation of 



THE PRICE OF LABOR. 1 35 

economic law. The price of labor, like that of every thing else, 
constantly tends to follow the line of the cost of producing the 
most expensive portion of any given commodity in the same mar- 
ket. The price of the Asiatic is lower than that of the European, 
and the price of the European is lower than that of the American, 
because his cost is less. The price of the farm-laborer is lower 
than that of the mechanic, and the price of the mechanic is lower 
in the country than in the city ; the price of the mechanic in the 
city is lower than that of the professional classes, and the price 
of the labor of women is lower than that of men in the same 
grade, for the simple reason that the cost of living, and conse- 
quently the cost of their labor, is less. 

What we have seen to be true in the case of manufactured 
products is also true of labor. The mere increase in the quan- 
tity, if of the same social quality, cannot permanently reduce the 
price, and vice versa. It may create enforced idleness which, as 
in the case of over-production, will inflict serious loss, but these 
who are employed must still receive the equivalent of their cost. 
If, however, the increased supply of labor is due to the intro- 
duction of a lower social quality — /.<?., less expensive grade of 
laborers, — this will tend to reduce the price. But the fall of the 
price in this case, as in that of agriculture, is due to the fact that 
the increased quantity was accompanied by reduced cost. It is 
the failure to recognize this distinction in the movement of price- 
making phenomena that has given such a general acceptance to 
the doctrine of demand and supply. The presence of the quan- 
tity is more easily observed than is the influence of the social 
quality, or cost. Hence the former has been assumed to be the 
determining cause, when it was only the accompanying incident, 
and the real cause has been generally overlooked. In order to 
illustrate this movement in the case of wages, let us suppose that 
there were 10,000 men employed in a given industry — the mini- 
mum cost of the most expensive 1,000 of them being $2.00 a day 
— if the laborers in that industry were increased to 15,000, and 
the least expensive of the new-comers required $2.00 a day, and 
the remainder of them required more, this increase of laborers 
seeking employment would not reduce wages. The result would 
be that the new-comers would fail to obtain employment. If, on 
the other hand, the 5,000 new-comers were from a lower civiliza- 



136 QUALITY NOT QUANTITY OF LABOR, 

tion, and their cost of living were only $1.00 or $1.50 a day, their 
influx would cause a reduction in the rate of wages. This 
would not be brought about by reducing the pay of the most ex- 
pensive that had been previously employed, but by substituting 
the new-comers for the old, in which case the dear men would be 
supplanted by the cheap men. The $2.oo-a-day men would not 
be working for $1.00, but they would be discharged and the 
$r.oo-a-day men would take their places. Thus, while the rate 
of wages would have fallen, it would not have fallen for the same 
laborers, but it would have fallen to the level of the new laborers 
because their cost was lower. This is what investigation has 
shown to be the case in hundreds of instances where non-union 
men have taken the places of strikers at a lower rate of wages. 
The non-union men do not take lower, but in such cases often 
receive higher, wages than they have previously obtained, which 
increase is made possible for them by the union men, and the 
union men who struck for the rise, and were superseded by the 
non-union men, seldom go to work elsewhere at lower wages, 
but, as a rule, find employment at their trade or in some other 
occupation at rates approximating those which they struck to 
secure.^ 

If the market for labor were increased with the advent of the 
new laborers so that the whole 15,000 could be employed, then 
no reduction of wages would take place ; because, in that case, 
the original $2.oo-a-day laborers being necessary, they still would 
form the most expensive portion of the supply, and their cost 
would consequently determine the rate of wages, and $2.00 a day 
would continue to be paid. It will be seen that, while the fall in 
the wages accompanies and seems to be fixed by the increased 
supply, it is really governed by the cost of the most expensive 
portion of the necessary supply. The fact that the $2.oo-a-day 
laborers were no longer needed destroyed their price-regulating 
influence. 

Suppose, for example, that 10,000 $3.oo-a-day American me- 
chanics should emigrate to a given locality in China where 10,000 
laborers were working, at the same trade, at from 10 to 20 cents 

^ The exception to this is where the strike has been inaugurated through the 
undue influence of a few individuals, and in advance of the demand of the most 
advanced 20 per cent, of the class or trade. 



WAGE VARIATION. 1 37 

a day ; it is very clear that the competition of the $3.oo-a-day 
Americans against the lo- or 20-cent-a-day Chinamen could not 
reduce their wages, — although the supply was increased over the 
demand by 100 per cent. The result in such a case would be 
exactly the reverse of the one just referred to, namely : that the 
new-comers, instead of supplanting the old, and thereby estab- 
lishing a lower rate of wages, if employed at all, would necessarily 
establish a much higher rate of wages, because their cost would 
be higher. Other things remaining the same, the fact would be 
that the new-comers would not be employed, — because their cost 
would be so much greater than the old laborers, and therefore the 
rate of wages would remain unchanged, and the new-comers would 
remain unemployed ; whereas, in the other case, the old workers 
became the unemployed, because the new-comers were less ex- 
pensive. It is clear then that the increased supply affects wages 
only when the new-comers introduce a variation in the cost. If 
they are cheaper a lower price will be established, because the 
cost-level is lower ; if they are dearer the price will be raised (if 
they are employed), because the cost-level will be higher. But 
the latter case seldom occurs, because the dearer man will seldom 
be employed in preference to the cheaper. This is why all emi- 
gration is from countries with a lower wage-level towards those 
with a higher wage-level ; why there is no emigration of European 
laborers to Asia, nor of American laborers to Europe. Here, then, 
we have a universal, scientific law of prices which explains both 
the permanent economic tendency and the uneconomic perturba- 
tions of all classes of price-receiving phenomena. 



CHAPTER V. 
THE LAW OF THE COST OF PRODUCTION. 

Section I. — Popular Errors Regarding the Cost of Production. 

Having seen that the cost of production is the controlling 
factor in the law of prices, we are now led to the consideration of 
what determines the cost of production. The popular theory 
upon this subject, though suggested by Adam Smith, was formu- 
lated and most ably stated by Ricardo — who insists that the 
" natural price of commodities," and the cost of their production, 
are determined by the quantity of labor involved. 

Assuming the existence of primitive hunters and fishermen, 
Ricardo says : " The comparative value of the fish and the game 
would be entirely regulated by the quantity of labor realized in 
each ; whatever might be the quantity of production, or however 
high or low general wages or profits might be." ^ What is true 
under these simple conditions, he asserts, will always be equally 
true in the most complex society. 

It may be readily admitted that the same principle which gov- 
erned the cost of production in the earliest state of society would 
obtain under the most complex conditions, but before we can 
consent to interpret the complex phenomena of modern society 
by a hypothesis based upon the simple conditions of the most 
primitive social state, we must at least be sure that it affords the 
true explanation of the phenomena from which it was constructed. 
It frequently happens in the more simple stages of phenomena 
that two facts occur simultaneously, either of which appears to be 
the cause of the succeeding phenomena ; and, from direct sense 

* " Political Economy and Taxation," p. i8. 

, 138 i 



SIMPLE PHENOMENA MISLEADING. 1 39 

impression, that which is most easily observed is most likely to 
be regarded as the cause. When the phenomena become more 
complex, however, and the variations more numerous and subtle, 
the effects of the two facts are separated, and it becomes of vital 
importance to learn which of the two enters the hypothesis. 

For example, when only the simpler astronomical phenomena 
were known, the geocentric hypothesis was sufficient to account 
for them ; but as the observations increased, and more complex 
phenomena appeared, the theory that the earth was the centre of 
the solar system became wholly inadequate, and the heliocentric 
hypothesis was necessary. So, too, when only the simpler geologi- 
cal phenomena were observed, the theory of a special creation 
appeared all-sufhcient, but as the knowledge of geological phe- 
nomena increased, this theory became inadequate to explain the 
age of the earth, and had to be abandoned. The same plausible 
error is also apparent in the law of supply and demand. At first 
glance, the statement that the quantity of labor devoted to pro- 
curing the game and the fish determines their cost seems quite 
plausible, but if we examine the case of the primitive man a little 
closer we shall find that an oversight similar to those just men- 
tioned has been committed. We will assume, as Ricardo evidently 
does, that the habits and customs of the hunter and the fisherman 
are identical. If so, and the hunter can average one deer a day, 
and the fisherman can catch two salmon a day, the quantity of 
labor devoted to procuring one deer and that devoted to procur- 
ing two salmon would be exactly alike. It would then be per- 
fectly correct to say that the cost of two salmon would be exactly 
equal to that of one deer. In other words, the cost of producing 
either salmon or deer would always be identical with the quantity 
of labor devoted to procuring either of them. It will be observed, 
however, that it would be equally correct to say that the cost of 
producing either the deer or the salmon was always identical with 
the cost of the labor devoted to procuring them, because, under 
these conditions, the cost of a given quantity of labor is exactly 
the same in either case. Therefore, the variation of the quantity 
of labor is a variation of the cost of labor. Hence, so far as ex- 
plaining this simple class of phenomena is concerned, it would 
make no difference whether we assume that the cost of the deer 
I or the beaver is determined by the quantity or by the cost of the 



I40 RICARDO'S ILLUSTRATION, 

labor which is devoted to their production, because in this case 
the two facts are identical. 

If we push the inquiry a little further, and ask why the quan- 
tity of labor devoted to procuring deer or salmon determines the 
cost, the true answer is because a given quantity of effort involves 
a given amount of cost to the laborer ; hence, the more labor he 
puts into a thing the greater is its cost. And if we ask why the 
cost of labor should affect the cost of the product, the obvious 
answer is because the laborer must obtain as much for his labor 
as it cost him, or he could not continue to furnish it. 

It thus appears that the mere quantity of labor devoted to 
caJtching the deer or salmon affects their cost only as it represents 
the cost of the effort to the laborers, and hence the amount which 
they must obtain for it. In other words, the same quantity of 
labor involves the same cost to the hunter and the fisherman only 
because the cost of a unit of labor is the same to each man. 
Therefore, while it is true in this case that the cost of producing 
the deer or the salmon varies exactly with the change in the quan- 
tity of labor devoted to obtaining them ; in the other cases the 
cost of the product varies with the quantity of labor, because every 
variation in the quantity carries with it a variation in the cost of 
that labor. To shov/ this more clearly, let us take the same two; 
men and suppose that the cost of living of the hunter is double^ 
that of the fisherman ; that he either consumes more expensive 
things, or that a greater number of things enter into his life. In 
this case, if he can only kill a deer a day, and the fisherman can 
catch two salmon a day, one deer will cost twice as much as two 
salmon, although no more labor is devoted to catching it. The 
reason that the deer costs more is because the labor devoted to 
catching it is more expensive. Since the labor of the hunter 
costs twice the labor of the fisherman, an hour's labor devoted to 
hunting costs twice as much as an hour's labor devoted to fish- 
ing ; consequently the cost of the product of the hunter will be 
double that of the fisherman. Thus we see that in the last analy- 
sis — even in the case of the primitive man — it is not merely the 
quantity, but the cost, of the labor that really determines the cost 
of the product. Therefore, the statement, that the same amount 
of labor always involves the same cost in production, is only true 
when it is accompanied by the other fact, namely, that the labo 
in both cases costs the same. 



1 



COST AND QUANTITY CONFOUNDED. I4I 

If we follow Ricardo from his primitive hunter and fisherman 
to his modern " stocking maker " we shall see how completely the 
error resulting from the failure to recognize this distinction per- 
meates his whole doctrine and vitiates his conclusions regarding 
the cost of production. He says : " If we look to a state of 
society in which greater improvements have been made, and in 
which the arts and commerce flourish, we shall still find that 
commodities vary in value conformably with this principle. . . . 
To convince ourselves that this is the real foundation of exchange- 
able value, let us suppose any improvement to be made in the 
means of abridging labor in any one of the various processes 
through which the raw cotton must pass, before the manufactured 
stockings come to the market, to be exchanged for other things, 
and observe the effect which will follow. If fewer men were re- 
quired to cultivate the raw cotton, or if fewer sailors were em- 
ployed in navigating, or shipwrights in constructing, the ship in 
which it was conveyed to us ; if fewer hands were employed in 
raising the buildings and machinery, or if these, when raised, 
were rendered more efficient, the stockings would inevitably fall 
in value, and consequently command less of other things. They 
would fall because a less quantity of labor was necessary to their 
production. . . . No alteration in the wages of labor produces 
any alteration in the relative value of these commodities." ^ It 
will be observed that Ricardo's conclusions in regard to the stock- 
ings are true only on the condition that something else is true — 
namely, that the price of labor has remained the same. Although 
reducing the quantity of labor in the manufacture of stockings 
may, it does not follow that it necessarily will, produce the effect 
here stated. 

As, for example, suppose that, through the use of improved 
machinery, the stockings could be made with one tenth fewer men, 
and, at the same time, that the price of the laborers still employed 
in making them were increased ten per cent, the cost of pro- 
ducing the stockings would remain absolutely unchanged, al- 
though ten per cent, less labor was devoted to their production. 
And, consequently, if the price of labor were advanced ten per 
cent., and the quantity of labor required to make the stockings 
remained the same (a fact of common occurrence), the cost of 

^ " Principles of Political Economy and Taxation," pp. 17-19. — McCulloch's 
edition, 1881. 



142 brassey's experience. 

producing the stockings would then rise ten per cent, without any 
change whatever in the quantity of labor required to produce 
them. It is thus very clear that the cost of producing the stock- 
ings may change without any alteration in the quantity of labor 
expended upon them, or the quantity of labor may change with- 
out any variation in the cost of making the stockings. Whether 
or not a change in the quantity of labor required to make the 
stockings will change the cost of their production, depends en- 
tirely upon whether it makes any change in the total amount paid 
for the labor employed in producing them. 

The experience of Mr. Thomas Brassey, who probably em- 
ployed a greater number of laborers in more countries than any 
other man in the world, fully establishes this position. Some of 
Mr. Brassey's experiences while employing labor in the construc- 
tion of railroads in England, France, Spain, Italy, Saxony, Aus- 
tria, Hungary, Belgium, Moldavia, Austria, Canada, the Argentine 
Republic, Syria, Persia, and India, when, according to Sir Arthur 
Helps, he sometimes had over eighty thousand persons in his em- 
ploy at one time, are given by his son in his book called " Work 
and Wages." 

In the construction of the Grand Trunk Railroad, so far as 
French Canadians were employed, he shows that about two fifths 
more labor was required to do the same work than in England.' 
Still the total cost was about the same. In the construction of 
the Paris and Rouen railroad in France a similar result is shown. 
Five days of a Frenchman's labor was only equal to three of an 
Englishman's ; still a mile of road built by the French laborers 
cost no more than the road built by the English laborers, simply 
because two fifths less wages were paid to the French than to the 
English laborers." So, in the quarry at Bonnieres, four French- 
men, or three Irishmen, were found to be equal to two Eng- 
lishmen.^ 

In contrasting the quantity of work and wages in England and 
Ireland, Mr. Brassey shows that, although about twice as many 
laborers were required in Ireland as in England to build a mile 
of railroad, " sub-contracts in the Irish railroad were let at the 
prices which had been previously paid in Staffordshire." * And 

1 " Work and Wages," pp. 86, 87. ^ Ibid., p. 82. 

' Ibid., pp. 79-82. * Ibid., p. 69, 



HIGH-PRICED LABOR THE CHEAPEST. I43 

in India, where the " sweat and sacrifice " of twelve or more 
native laborers was bestowed on making as much road as would 
be accomplished by one Englishman, Mr. Brassey declares that, 
"mile for mile, the cost of railway work is about the same as in 
England." ' The same is true of other industries. The toil of 
fifty-two laborers is required in smelting the same amount of pig- 
iron in France as is done by twenty-five laborers on the Tees "^ ; 
and the cost of producing the iron in the two countries is about 
the same. Statistics show that the same variation in the quan- 
tity of labor required to produce the same commodities in dif- 
.ferent countries prevails in different branches in the same 
countries, and consequently that it is invariably the total amoi^nt 
paid, and not the quantity of labor employed, which determines the 
cost of productio7i. 

Section II. — High-Price d Labor Makes Low Cost of Pro- 
duction and Cheap Products, 

After what has been said, to affirm that a rise in the wages of 
labor will lessen the cost of production and diminish prices, may 
have a paradoxical seeming. If the value of commodities is de- 
termined by the cost of production, and the cost of production is 
determined by the price — and not by the quantity, — of labor it 
would, at first, seem to follow, that a rise of wages involves an in- 
crease of cost and a consequent rise in the price of products. 
But this is one of the many instances in economics where things 
are not as they appear from direct observation. Ricardo could 
see that, other things being the same, any variation in the quan- 
tity of labor expended causes a corresponding variation in the 
cost of production ; but he could not see that any change in the 
price of labor has the same effect. To him, the only result of a 
rise in wages is a fall in profits. Indeed, he explicitly declares : 
" No alteration in the wages of labor could produce any altera- 
tion in the relative value of these commodities " ^ ; but he adds : 
" Not so with the other great cause of the variation in the value 
of commodities, namely : the increase or diminution of the quan- 

' " Work and Wages," pp. 79-82. 

^ F. A. Walker, " Wages Question," p. 44. See also Brassey's "Work and 
Wages," p. 165, 2d edition. 

^ '* Principles of Political Economy and Taxation," p. 19. 



144 RELATION OF WAGES TO MACHINERY, 

tity of labor necessary to produce them. . . . Every improve- 
ment in machinery, in tools, in buildings, in raising the raw 
material, saves labor and enables us to produce the commodity 
to which the improvement is applied with more facility, and 
consequently its value alters." ^ 

In saying that improved machinery is the potent means of 
reducing the cost of production, Ricardo recognized a funda- 
mental truth, but by failing to see the connection between 
machinery and wages, he entirely overlooked the influences 
which promote the use of the labor-saving methods. If he had 
seen the logical necessity of explaining the causes that promote 
the use of machinery as clearly as he did see the fact that 
machinery reduces the cost of production, his investigations 
would have forced him into recognizing the absurdity of his 
cheap-labor doctrine. All writers on economics have shown a 
due appreciation of the fact that the extensive use of capital and 
improved methods is indispensable to the large and cheap pro- 
duction of wealth. Nor have they had any difficulty in seeing 
that, by the increased concentration of capital, the cost of pro- 
duction and the price of commodities have been lowered ; but 
they have made practically no effort to explain how the success- 
ful use of capital and machinery becomes possible. Adam Smith 
did go far enough to see that the division of labor and the use of 
capital was " limited by the extent of the market," but it did not 
occur to him to consider the economic relation that wages sustain 
to the extent of the market, and that relation has been largely 
overlooked since his time. 

American writers have recently attempted to approach this 
subject on independent lines. The most creditable efforts in 
this direction are those of Stuart Wood and John B. Clark." 
Both of these writers fully recognize auxiliary capital as the 
means of lessening the cost of production and of cheapening 
commodities. Indeed, they go one step further and recognize 
the fact that capital, or machinery, can only be employed in pro- 
duction when it is cheaper as a productive force than labor. 
" Machinery is preferred," says Stuart Wood,' " simply because 

' Principles of Political Economy and Taxation, p. 24. 

2 " Publications of American Economic Association," vol. iv., No. I, 

' Quarterly yournal of Economics, pp. 67, 68. 



STUART WOOD'S THEORY. I45 

the cost of production is lessened by its use. Also, in many pro- 
cesses now executed by hand, machinery would be equally effi- 
cient, but it is not used because it would involve a greater cost 
of production, . . . but there are other cases in which the 
cost is equal, or very nearly equal, whether labor is employed, or 
auxiliary capital. In such^ cases, the slightest change in the price 
of labor immediately affects the demand for it . . . Where 

'the cost is just equal, labor and capital will be used indifferently. 
On either side of this point that one of the two will be employed 
which is relatively the cheapest." 

Stuart Wood manifestly sees that something in addition to the 
mere existence of capital is necessary to make its economic use 

\ possible. It is also clear to him that nothing can do this which does 

i not make capital cheaper than labor, as a means of production. 

; The important question that arises here is the same as that which 
confronted Ricardo, namely : how, or under what conditions, 

: will the use of capital become cheaper than labor ? To this 
question Wood, like Ricardo, is silent. The nearest that he 
comes to dealing with it is to suggest that the one will be em- 
ployed which will accept the least return for its effort. 

According to this theory, capital can only be employed by dis- 
charging labor. If this doctrine is correct, the anti-power-loom 
rioters in England were right, and the ignorant laborers — who to- 
day oppose the introduction of improved machinery — are acting 
upon sound economic principles. In short, the factory methods of 
production would simply mean the degradation of labor, and the 
charge so commonly made by the socialists, that capitalists are 

•the natural enemy of the laborer, would be fully sustained, be- 

: cause the effect of capital would constantly be to compel the 
laborer to choose between low wages and enforced idleness. 

Again, if capital could only be employed by discharging labor 
it would destroy its own success. By discharging the laborer it 
would destroy his power to consume, and thereby reduce the 
markets for its own products. The enforced idleness thus cre- 
ated reduces the market in exactly the same proportion that the 
use of capital saves labor, and consequently all that is gained by 
the cheap product is lost by the increased idleness. 

This theory is clearly contrary to experience. It is one of the 
most obvious facts in the history of machine-made products 



146 FUNCTION OF CAPITAL, 

that the use of capital and machinery in production does not 
permanently increase enforced idleness among the laborers. 
There are three important facts always connected with the use 
of machinery, (i) It can only be employed when it can do the 
work cheaper than labor. (2) It can only do the work cheaper 
than labor when it produces the same amount with less labor. 
(3) It can only successfully save labor when it is accompanied by 
new employment creating conditions. Displaced labor can only 
be saved when it is re-employed. How to create new employ- 
ments to absorb the discharged laborers must be explained before 
the question — how capital can become a cheaper productive force 
than labor — can be answered. 

The great fact underlying all successful production is con- 
sumption. The first condition to the success of any method in 
production is a market for the products ; therefore nothing can 
make the use of capital successful which does not supply a mar- 
ket for the products. The mistake of Wood's theory is that it 
fails to reckon with this fact. It assumes that which Clark more 
explicitly states/ namely : *' As capital outgrows labor in quan- 
tity ... it pushes outward the independent margin of its own 
field." This is an entire mistake. Capital can only become an 
active, productive force under certain social and economic con- 
ditions, and it is wholly powerless to create these conditions for 
itself. Capital is a tool, or instrument, and its function is to 
supply markets, but not to make them, — a fact that these econo^ 
mists have overlooked. If their doctrine were correct, every 
increased supply of a commodity at a reduced price would 
be certain to find a market ; and yet the patent-offices of the 
world supply evidence to the contrary. Thousands upon thou- 
sands of examples of improved contrivances, that can produce 
commodities at less than current price, cannot be used because 
their products cannot be sold. 

It is true, within certain limits, that to reduce the price of a 
commodity will increase the sales, because that will put it within 
the reach of those who previously desired it, but whose desire 
was not sufficiently strong to induce them to give the larger price. 
It is only because the desire already exists, however, that the 'i 
product can be sold, even at the reduced price." The most that 

^ Publications of Economic Association, vol. iv,, No. i, p. 57, 

2 This much was clear even to Ricardo, for he says : "If the natural price of 



IMPORTANCE OF THE MARKET. 



H7 



can ever occur in this line is that the price can descend to meet 
the weakest effectual demand. 

It is entirely outside the province and power of capital to 
create the conditions for its own successful employment. Were 
this otherwise, capital would never be idle, and failure, bank- 
ruptcy, and industrial depressions could never occur, because it 
could always make investments profitable by creating markets for 
its own products ; whereas we know that hundreds of millions of 
dollars are constantly waiting for an opportunity to be profitably 
employed, and failure, bankruptcy, and industrial depressions are 
among the most painful industrial experiences. 

Since capital can only be profitably employed when it can work 
cheaper than labor, and since neither the formation of new indus- 
tries nor the extension of old ones is possible without an increase 
in the consumption, it follows that the employment of capital in 
production finally depends upon the extension of the market for 
commodities. No theory, therefore, can explain the employment 
of capital which does not explain the creation of new or larger 
markets. This neither Ricardo, Wood, nor Clark has done, and 
consequently they have failed to explain how capital can become 
cheaper than labor, and machinery be economically substituted 
for muscle. 

It should be remembered that it is a characteristic feature of 
the use of machinery that its superiority over labor does not 
consist in its capacity to produce a small amount of wealth at a 
less cost than labor, but chiefly in its power to produce a much 
larger quantity at a relatively less cost, i.e. a smaller cost per 
unit of product. And, as the cost of the whole product must be 
defrayed by the income from that portion which is sold, the eco- 
nomic success of the machine depends upon the possibility of 
selling all the increased quantity which it produces. 

There is no fact in modern history more easily demonstrated 
than that the products of steam-driven machinery are mainly 
consumed by the common people — the masses. While the mid- 
labor should fall 50 per cent, from some great discovery in the science of agri- 
culture, the demand would not greatly increase, for no man would desire more 
than w-ould satisfy his wants ; and as the demand would not increase, neither 
would the supply, for a commodity is not supplied merely because it can be 
produced, but because there is a demand for it." — " Principles of Political 
Economy and Taxation," chapter xxx., p. 234, McCuUoch's edition, 1881. 



148 WAGES MEASURE CONSUMPTION. 

die and, to some extent, the upper classes consume machine-made 
products, their consumption constitutes such a small proportion 
of the market that probably no modern factory or railroad could \ 
be sustained by their demand, at present prices. It is therefore : 
the consumption of the laboring classes which determines the ; 
success or failure of factory methods of production. This ex- 
plains why the railroads and the factory system cannot be 
employed in Asia, Africa, and the more backward countries in 
continental Europe, where the wages are low and the masses 
consume but slightly of manufactured products. 

Therefore, as wages must measure the extent of consumption 
by the masses, we are inevitably driven to the conclusion that in- 
stead of the advance of wages being dependent upon the more 
extensive use of capital and machinery, — as Wood and Clark * 
and the wage-fund economists would have us believe, the fact is 
exactly the reverse, and the successful use of capital depends 
upon the general and permanent rise of wages. Clearly, then, it 
is to the influences that promote the rise of wages that we must 
look for the extension of the use of capital, and the consequent 
lessening of the cost of production and lowering of prices. Al- 
though the consideration of the law of wages, and the influences 
that promote their increase, will be deferred to a subsequent 
chapter, it is not difficult to see at present how, through the nor- 
mal operation of economic law, a rise of wages necessarily tends 
to promote the use of capital and machinery. 

Wages, being the price of labor, are chiefly influenced by the 
social forces that determine the life and character of the laborer. 
Although their upward movement is always subtle and composite, 
moving in almost insensible gradations, it is none the less positive 
and aggressive. The first economic effect of the laborer's demand 
for high wages is an increase of pressure upon the employer's 
profit, who will endeavor to avoid it by passing it on to the con- 
sumer in the form of higher prices. The consumer, acting upon 
the same principle, endeavors to resist the higher prices by refus- 

^ " By this twofold action only can wages rise with greater rapidity. But that \ 
movement of the margins is possible only by means of a considerable excess 
in the supply of capital unbalanced by labor." — " Possibility of a Scientific Law 
of Wages," in Publications of American Economic Association, vol. iv.. No. I, 
P- 59- 



THE LA W OF PRICES. 1 49 

ing to purchase, or by buying a smaller quantity of the products, 
thus forcing the manufacturer- to lose by smaller sales what he 
gains by increased prices. On the other hand, if the employer 
attempts to resist the upward tendency of wages, he is met by the 
stoppage of his works, and this involves an economic loss which 
will only be encountered as a last resort. Ultimately, therefore, 
the employer is compelled to choose between the use of the im- 
proved methods by which his commodities can be made cheaper, 
or the loss of his profits, and perhaps of his capital. Thus, while 
unconsciously avoiding the dangers that beset him, he becomes 
able to produce a larger amount at the same cost, and by this 
means he can comply with the demand of his laborers for higher 
wages without diminishing his profits — and often reduce the price 
of the commodity as well. A reduction in the price puts com- 
modities within the reach of another large class who were pre- 
viously unable to consume them, and the market is thereby 
extended, thus enlarging the income without raising the rate of 
profit ; all of which tends to further increase the demand for 
labor, and to improve the general well-being of the community. 

We are now in a position to present a complete formula of the 
law of prices, thus : (i) The price of commodities constantly 
tends towards the cost of producing the most expensive portion 
of the necessary supply in any given market — the movement tow- 
ard that equilibrium increasing directly as economic knowledge 
and freedom are extended, and inversely as they are restricted. 
(2) The cost of production is ultimately determined by the price 
of labor and moves inversely with wages. (3) Prices are finally 
governed by wages — rising as wages fall, and falling as wages 
rise. 

If we regard the fact that high wages make low prices as a 
principle in economic law, it will become clear that a low paid 
man is the dearest thing on earth ; and that, through the democ- 
racy of natural law, the wealth and civilization now enjoyed by 
the most advanced people can be made cheaper for all, than 
the poverty and barbarism which now prevail among the great 
mass of mankind. 



CHAPTER VI. 
MONEY AND ITS ECONOMIC FUNCTION. 

Section I. — What is Money ? 

Money is generally defined as the medium of exchange. The 
chief objection to this definition is its indefiniteness. In order 
to receive any clear idea from the expression, "medium of ex- 
change," it is necessary to know in what way money facilitates 
exchange. Is it wealth, or is it only a representative of wealth ? 
If a representative of wealth, how does it represent it, — as prop- 
erty, or as credit ? 

Francis A. Walker has endeavored to solve this difficulty by 
defining money ^ as " that which passes freely from hand to 
hand throughout the community in final discharge of debts and 
full payment for commodities." This has been accepted by 
Sidgwick and others as the best and most complete definition of 
money yet given, and as such it is used in the last edition of the 
" Encyclopedia Britannica." ^ 

If this definition be correct, money must be wealth. A debt, 
being simply wealth due from another, can only be finally dis- 
charged by the payment of the wealth due, or its equivalent in 
some other form of wealth. Obviously, nothing but wealth can 
economically cancel an obligation to deliver wealth. If money 
is wealth, then every increase of money must be just so much 
actual addition to the aggregate wealth of the community, — a 
notion which is too absurd to need refuting. Yet it is exactly 
because, in one way or another, money has been regarded as 
wealth, or capital, that so many schemes have been invented for 
enriching society by increasing the value of money. 

^ " Money, Trade, and Industry," p. iv. 
* Vol. xiv,, p. 720. 

150 



MONEY NOT WEALTH. 151 

In considering the question whether or not money is wealth, 
we must be careful not to confound the idea of money with the 
material of which it is made. If money is wealth, it must neces- 
sarily contain the equivalent in wealth of that for which it will 
exchange. This w6 know^is frequently not the case. When 
sheep, or cattle, or corn were used as money, or when money is 
made of gold or silver of full weight and standard fineness, this 
may be true, but when it is made from almost any other sub- 
stance this is not true. When a gold dollar of full weight and 
fineness is exchanged for a given amount of cloth, furniture, or 
other commodities, property in the dollar is the economic equiv- 
alent of the commodity. But when a hundred bronze pennies 
are exchanged for the same amount of commodities, an equivalent 
in property is not given because the value of the wealth in the 
pennies is not as great as that in the commodities. And when a 
dollar bank-note is given for a gold dollar or its equivalent in 
any other commodity, the receiver of the note does not get the 
equivalent in wealth of one per cent, of what he gave. But, as 
money, he received as much in the paper bank-note, or in the 
bronze pennies, as in the gold or silver dollar. Indeed, if the 
pennies, or bank-notes, were regarded simply as wealth, they 
never would be accepted in exchange for the commodities, or for 
the gold. It is only as money that they are ever so accepted. 
The reason for this is that, as money, the notes and pennies were 
the equivalent of the gold, silver, or commodities, but, as wealth, 
they were not. Obviously, therefore, money and wealth are not 
identical. Wealth may be made into money, but money /^r se is 
not wealth. 

If we examine a few transactions in which money is employed, 
the difference between wealth and money, and the functions that 
they fill, will be more easily discerned. For example, take a 

; transaction between the producers of apples and shoes. The 
shoemaker desires a barrel of apples and the farmer desires a 
pair of shoes. When the farmer delivers the apples to the shoe- 

' maker the latter is in the farmer's debt, say $2.00. When the 
shoemaker delivers the shoes, the debt is finally cancelled,. But 
suppose the shoemaker wants two barrels of apples, and the 
farmer wants only one pair of shoes ; when the apples and the 
shoes are both delivered, a balance, equivalent to one barrel of 



152 MONEY EVIDENCE OF CREDIT. 

apples, will remain to the credit of the farmer. The shoemaker 
offers him a second pair of shoes, but these he declines, having 
no use for them, or having a stronger desire for something else. 
Since the shoemaker wants the apples and has no other com- 
modity to offer in exchange that is acceptable to the farmer, in 
order to balance the transaction, he gives him $2.00 in money. 
For our purpose it does not matter what the money is made of, 
so long as the farmer will accept it. This transaction represents 
myriads that take place every day. Here the farmer delivered 
two barrels of apples, for one of which he received an equivalent 
in a pair of shoes, for the other he received $2.00 in money. 
Now what position did the money occupy in this transaction ? 
Did it figure as wealth ? Was it accepted by the farmer as an 
equivalent for the second barrel of apples in the same sense that 
the shoes were accepted for the first ? Nothing of the kind. 
There is no way in which the farmer can consume the $2.00 in 
the gratification of any of his wants or desires, physical or social. 
It is absolutely of no use to him except as he can exchange it for 
wealth or service. It was only on the assumption that others 
would receive it from him in exchange for an amount of wealth 
equivalent to what he gave the shoemaker for it, that he ever 
consented to take it at all. 

It is very clear then that the farmer received the money in lieu 
of wealth. In the case of the first barrel of apples, where an ex- 
change of wealth actually took place, no money was required. 
It was only when the shoemaker did not give wealth for the 
apples that he had to give money. In short, the money was 
simply a substitute for wealth ; an evidence that an equivalent 
had not been delivered. Therefore, instead of the $2.00 having 
been the final settlement of the debt to the farmer, it was exactly 
the reverse. It was simply the evidence that the debt had not 
been finally settled. 

The same is true of labor. When the laborer works a day 
and receives $2.00 for it, he has not received the equivalent of 
his service in wealth ; but only that by which he can obtain 
wealth, — the evidence that he has rendered the services for 
which he has not yet received an equivalent. 

It may be said that if the money given to the farmer for his 
apples, or to the laborer for his day's service had been gold, the 



DEFINITION OF MONEY. 1 53 

debt would have been finally cancelled. That would be correct, 
but the debt in that case would not be cancelled by the money, 
but by the gold of which the money was made — which is quite 
different. Gold is property, or wealth, just as much as shoes, 
wheat, or any other product, and therefore it cancels debt. A 
given quantity of silver, iron, tin, copper, leather, or any other 
product of the same value, would equally cancel debt. The 
only difference between receiving gold, and other property for 
which one has no immediate use, is in its convenience for being 
handled, the general knowledge of its value, and the uniform 
willingness of others to accept it. An ounce of gold in bullion 
will cancel a debt just as effectively as an ounce of gold in coin. 
But when gold is used for money, so far as the money function 
is concerned, it is accepted solely with the view to being subse- 
quently exchanged for other commodities. It is only because it 
will be so accepted that people will give their commodities for it. 
Were this otherwise, the farmer would have taken another pair of 
shoes in preference to two gold dollars for his second barrel of 
apples, for, while he did not need the shoes, he could probably 
have utilized them sooner than he could the gold in any other 
way than exchanging it for other things. 

So long as wealth can be directly exchanged in convenient 
quantities, no medium is required. It is only when we desire a 
commodity and have not an acceptable article in convenient 
quantities to give in exchange for it, that money is of any ser- 
vice. Thus, by introducing the element of credit — of which 
money became the circulating evidence — the farmer and the 
shoemaker were greatly assisted in obtaining what they most 
desired. In other words, it made an indirect complex process of 
exchange possible by substituting an accepted token of obligation 
for present payment of debt. 

Money, then, may really be defined as : a title to wealth not 
delivered ; as the medium through which the most indirect and 
economic exchanges are facilitated by giving currency to credit 
and substituting obligation for present payment in economic 
transactions. 

Section II. — The Economic Functions of Money. 
In order to constitute an efficient instrument for facilitating 
.economic exchange, through a series of incomplete transactions 



154 THE FUNCTION OF MONEY. 

giving currency to credit, money must be capable of filling at 
least two functions. It must supply : (i) A standard or de- 
nominator of value ; (2) A convenient medium for circulating 
obligations which will be uniformly accepted. 

Since value is the ratio in which specific quantities of wealth 
and service will exchange for each other as economic equiva- 
lents ; for money to be a measure of value, it must have relation 
to a specific quantity of a special kind of some particular com- 
modity. Upon the same principle that things which are equal to 
the same thing are equal to each other, the value of any given 
commodity will constitute the measure of value for all commodi- 
ties. Whatever therefore will correctly indicate the value of a 
definite quantity of a given commodity of specific quality, and 
will be uniformly accepted at par in exchange for commodities 
and service, will fulfil all the functions of money. 

Money, per se^ is not a physical quantity, but only a mental 
measure of the exchange relation of quantities. Its economic 
function is to furnish a standard by which the value of different 
quantities of wealth and service can be measured and compared ; 
thus facilitating exchange and the mobility of wealth, by enabling 
credit to be substituted for barter without violating equity in the 
final fulfilment of obligation. 

Nor has the community any interest in money being cheap as 
is commonly assumed. The principal object in all economic 
transactions is to obtain wealth, and the process whether simple 
or complex, always involves the giving of service. Service being 
the human, and wealth the nature, side of all economic movement, 
it follows that the community is wholly interested in the value of 
wealth falling and that of service rising ; and were money wealth, 
the public would be equally interested in having its value dimin- 
ished, but it is not. No class in the community, except mere 
money speculators, can have any interest in promoting either a 
rise or fall in the value of money. aj 

Since wealth is cheap or dear only as it will exchange for 
a large or small quantity of service, nothing can cheapen wealth 
which does not reduce its value as compared with that of labor. 
Now this is precisely what a change in the value of money cannot 
accomplish. Money being merely the general denominator of 
value, to which the value of all other things is referred, any 



EVILS OF FLUCTUATION, I 55 

change in its value would affect every thing else equally. To 
assume that the relative value of one article could be altered by 
a change which equally affects all, is to assume that things which 
are equal to the same thing are not equal to each other. For 
example, if there should be a fall of ten per cent, in the value of 
money, the effect would be a rise in the value of commodities 
and all who own commodities v/ould receive ten per cent, more 
money for the same quantity, but this would be equally true 
of labor. For the same reason that ten per cent, more money 
would be received for a bushel of wheat, or a suit of clothes, ten 
per cent, more money would have to be given for a day's work. 
The necessary consequence of such a change would be that, 
while the employer received more for his goods, he would have to 
give more for his labor and raw material ; and conversely, all the 
laborer received as increased wages he w^ould have to pay in 
higher prices, and the amount of wealth obtained for a day's 
service would remain absolutely unchanged. The relative value 
of wealth and service thus remaining the same, the only result of 
the change would be that more money would be used in each 
transaction, — for which nobody would be the gainer. 

If, however, this change should occur suddenly, it would cause 
a temporary disturbance in economic relations. All who had 
contracted debts would gain ten per cent., because money would 
be worth ten per cent, less than when their obligations were con- 
tracted. But this gain by the debtor class means just ten per 
cent, loss by the creditor class ; and this would only apply to 
previously existing contracts ; all future transactions would be 
entirely unaffected by the change, because the new obligations 
would be assumed on the basis of the new value. Thus, what- 
ever gain would result from such a change in the value of money 
would be of the most uneconomic character : like robbery, it 
would simply enable one to gain by the loss of another. More- 
over, such uneconomic changes in the value of money involve 
serious disturbances in business relations, and consequently 
an economic loss to the whole community. 

It thus appears that society has nothing to gain, but much to 
lose, by fluctuations in the value of money. 

Clearly, then, while it is of vital interest to the industrial and 
social welfare of the community that the value of wealth should 






156 THE VALUE OF MONEY, 

fall, and the value of service should rise as rapidly as possible, it 
is scarcely less important that the value of money should change 
as little as possible. The efficiency of money in economics, like 
that of weights and measures in business, depends upon the sta- 
bility of its character and the convenience of its form. Therefore 
the important question to settle is not how to make money cheap 
or abundant, but, how to minimize the variations in its value and 
maximize its circulating convenience. 

Section III. — The Value of Money. 

In considering the value of money two things should ever be 
borne in mind, namely, that value is simply the ratio of exchange, 
and that money is the accepted standard for measuring this ratio. 
No matter, therefore, of what money is made, or even if it were 
never reduced to material form, but simply consisted of verbal 
expression passed from person to person, it must necessarily 
relate to some definite quantity of one or more of the commodi- 
ties subject to exchange. Otherwise the expression, penny, shil- 
ling, pound, cent, dollar, etc., would convey no definite idea to 
either buyer or seller. 

Two questions here arise : (i) Is it essential that money be 
made of the commodity it represents ? (2) Would a multiple , 
unit form a more invariable basis for the value of money than a 
unit of a single commodity whose value is least variable ? 

(i) Whether or not money shall be made of the commodity it 
represents and contain property to the full amount of its face 
value depends upon the state of civilization. In a state of society 
where commercial and social integrity are so high that a promise 
will never be violated, money can be purely representative ; it 
only needs to have sufficient material in it to convey the evidence 
of an expressed promise, but in a state of society where the moral 
character is not sufficiently developed to make the written wore 
the highest bond, it becomes necessary to have the promise 
secured by property in the money. In other words, just in pro- 
portion as the security of the fulfilment of obligation is lacking^ 
in the moral character of the community, it has to be furnished 
in the material, or property-character, of its money. And con- 
versely, as the moral character of the community rises, the^ 
property-character of the money departs. Accordingly in the 



I 

;d 

\ 



ESSENTIAL ATTRIBUTES OF MONEY. I 57 

lowest stages of civilization we find money entirely composed of 
property, and, as civilization advances, of token-money and 
purely representative-money (written or printed obligation). 
Furthermore, so long as property-money is needed in the trans- 
actions of any portion of the community, it must be the basis of 
the transactions of all, because, unless the money used by the 
highest is such as to command the confidence of the lowest, 
commercial intercourse would be impossible. Since no country 
has yet risen above the necessity of using property money in 
some portion of its exchanges, and many countries still need it 
for the greater part of their transactions, some portion of the 
money of every country must continue to be made of the com- 
modity which it represents. And conversely, the commodity of 
which the property-money is made must be that upon which all 
the pure, or representative, money is based — that is to say, the 
value of a given unit of that product must be the standard by 
which the value of all other commodities is measured when re- 
ferred to in terms of money. 

Therefore, in selecting the commodity, or commodities, which 
would best serve as property- or barter-money, several questions 
should be considered in addition to the stability of its value, (i) 
It must possess utility — that is, it must be a commodity in itself, 
generally desirable for the purposes of consumption, entirely 
apart from its use as m-oney. (2) In order to be a generally 
acceptable instrument of exchange it must be easily transferred, 
in which case it must possess the maximum value in the mini- 
mum quantity, (3) It must be a commodity whose form and 
qualities have the maximum durability, so that its value will 
not deteriorate. (4) It should be of uniform quality, so that 
every unit of it will be equal to every other unit. (5) It should 
be a commodity whose value is subject to the minimum vari- 
ation. 

While almost any commodity would serve as a unit of measure- 
ment and a basis of value which pure money could represent, 
very few commodities possess the above qualities in the degree 
necessary to constitute them a good circulating medium as prop- 
erty-money. Almost every commodity has been employed for 
this purpose, in some stage of civilization, but experience has 
shown that if barter- or property-money must be employed, the 



158 THE DOUBLE STANDARD. 

precious metals, particularly gold and silver, are best suited to fill 
that function. 

It is commonly held that, in addition to its other advantageous 
qualities, the value of gold is less liable to variation than that of 
any other commodity. Whether this claim can be fully sustained 
or not, it is well known that the value of gold is subject to con- 
siderable fluctuation. Even if the value of gold were less firm 
than that of some other commodities, its superiority for the pur- 
poses of money in so many other respects would still make it 
preferable to any other commodity. The question arises, there- 
fore, would not the aggregate value of a large number of units of 
products form a more invariable standard of value than the unit 
of a single commodity like gold ? 

(2) It has been frequently contended by able writers that the 
double standard of silver and gold tends to form a less variable 
value than could be obtained by the use of either one alone. It 
is claimed that the two exercise what Wolowski calls compen- 
satory action. This is brought about, they say, by the fact that 
if either silver or gold falls in value there at once arises a ten- 
dency to transport the cheaper metal to the point where it is 
most needed, and vice versa, thus tending to establish an approxi- 
mate equilibrium between the two metals, and a less net variation 
in the value of both. There may be some strength to this claim, 
but it has not yet been established by any extensive experience. 

It has been suggested by some writers that a more invariable 
standard of value could be obtained by taking a given quantity 
of a large number of staple commodities, and making their aggre- 
gate value the standard upon which the unit of money should be 
based. This idea was first presented in England by Joseph 
Lowe, in a work, *' The Present State of England in Regard to 
Agriculture, Trade, and Finance " (1822) ; and again in 1833 by 
Mr. G. Poulett Scrope, and in 1875 by Stanley Jevons, in his 
work on " Money and the Mechanism of Exchange." The idea in. 
this proposition is that while the value of each of a hundred dif- 
ferent articles might vary more than gold, their variation would 
frequently be in different directions and offset each other ; and, 
in the general movement of the value of the whole body, much of 
the fluctuation of any particular article would be eliminated. 

This is seen in the movement of prices during the present 



THE TABULAR STANDARD, 



59 



century. While some commodities have fallen 60 and 70 per 
cent, in value, and others have increased considerably, the mean 
level of prices, compared with gold, has only fallen about 14 
per cent., so that the general price-level has probably varied less 
than that of any one commodity. If one commodity is used as 
the unit of value, and in the production of that article improved 
machinery should be introduced to any considerable extent, its 
value would be greatly reduced, as that of all machine-made 
products has been. On the other hand, if it is an article in 
whose production hand-labor is chiefly employed, then its value 
will rise just as fast as wages increase and civilization advances, 
as in the case of farm and garden products. But if the price- 
level of a hundred or more principal commodities, including both 
manufactured and agricultural products, and the aggregate value 
of a definite quantity of each were taken as the standard unit of 
value, it is quite certain that their value would be far more steady 
than if based upon any particular one. The movement of the 
variation in value would not only be more permanent and grad- 
ual, thereby avoiding sudden perturbations, but the change in 
value would represent the influence of civilization upon the cost 
of producing wealth in general, and not that of some abnormal 
force, like speculation, upon any particular article which may 
produce a temporary change in value out of all proportion to 
the general movement. Even this method would not dispose of 
the use of the precious metals as money so long as property-money 
is necessary, but it would obviate much of the business disturb- 
ance and loss to the debtor and creditor class consequent upon a 
sudden change in the value of gold or silver, because, while gold 
might remain the nominal denominator of value, its value would be 
measured by the aggregate value, at any given time, of the hun- 
dred or more articles of which the multiple standard is composed. 
For example, if the stipulated quantity of the hundred articles 
composing the tabular standard of value will exchange for $1,000 
in gold on the first of January, 1890, and on the first of January, 
1891, they will only command $900 in gold, it would be evident 
that the gold had risen in value 10 per cent., as compared with 
the articles in the tabular standard. Therefore, all obligations, 
whether in the form of mortgages, borrowed money, or general 
purchases contracted on the first of January, 1890, could be can- 



l6o REQUISITES OF TABULAR STANDARD. 

celled on the first of January, 1891, with 10 per cent, less gold 
than at the time of the agreement. But, by receiving 10 per cent, 
less gold, the creditor would receive the equivalent of exactly the 
same amount of the various commodities as if they had been paid 
in gold when the contract was made. By this means the debtor 
would avoid the loss consequent upon the rise in the value of gold 
during the year. Thus whether a debt was paid by the same 
amount of gold or not, it would always be cancelled by an amount 
of gold equivalent in value to the same quantity of general com- 
modities that the debt originally represented. Therefore, whatever 
effect the variation in the value of gold had upon the quantity of 
money received, it would have practically none upon the quan- 
tity of wealth received. By thus making the value of money 
depend upon that of the general body of staple commodities, 
it would, at least, remove it further from the influence of mere 
capricious speculation and confine its fluctuations to the normal 
movement in the general value Of wealth. 

The principle involved in a tabular standard is unquestionably 
sound. That it would tend to minimize the fluctuations in the 
value of money is as certain as that the movement of large bodies 
is more steady than that of small ones. It is simply the applica- 
tion of the law of averages to the unit of value, which has been so 
completely demonstrated in the sphere of insurance. Like all 
instruments of increased complexity, however, it presents some 
difficulties in application, on its first introduction. In the first 
place, it would necessitate the extensive collection of exact data 
regarding the prices of commodities, particularly those included 
in the tabular standard. It would require a well-defined systei 
of computing the purchasing capacity of gold as compared with 
given unit of these commodities ; and it would also be necessar] 
that the results, thus scientifically established, should be authorij 
tatively published every week, or oftener. Perhaps the most diffi^ 
cult feature connected with the scientific application of this prin-j 
ciple to the value of money, is the method by which the actu£ 
price-level of a given unit of these commodities shall be arrive( 
at. This subject has already occupied the attention of statistician^ 
for a considerable time, entirely independent of the idea of it^ 
use in the construction of a tabular standard for the value oi 
money. Soetbeer, Jevons, Laspeyre, Newmarch, and Mulhall 



( 



SCIENTIFIC PRICE-LEVEL, l6l 

have all endeavored, with varying success, to construct a scien- 
tific system for ascertaining the general price-level of all com- 
modities. All but Mulhall have adopted the index-number 
method ; he has adopted the " volume-of-trade " method, which, 
though more laborious, is doubtless the more accurate system. 
That a scientific method will be established for ascertaining the 
exact price-level of any given number of commodities can liardly 
be doubted ; and that it should be established is of the utmost 
importance to economic science. Indeed, what the science most 
lacks to-day is exact knowledge of economic data. Therefore 
the idea of the tabular-standard theory should not be rejected 
merely because of the difficulties of its practical application. On 
the contrary, if it is sound in principle, it should serve as an ad- 
ditional incentive for establishing a scientific system of ascertain- 
ing the actual general price-level of commodities, without which 
the knowledge of economic data will become less exact as indus- 
trial phenomena increases in volume and complexity. 

It will be observed, however, that the only object in adopting a 
single, double, or tabular, monetary standard, is simply to obtain 
the most invariable basis for the value of money. Consequently 
the only question of economic importance connected with the 
whole subject of money is, how to maximize the convenience of 
its form, and minimize the variation in its value. 

Section IV. — The Depreciation of Money. 

The depreciation of money and a fall in its value are distinct 
phenomena, and produced by very different causes, although they 
have the same effect upon its purchasing capacity. The differ- 
ence may be stated thus : A fall in the value of money means 
that the value of a particular class of property — gold, silver, or 
the like, — upon which it is based, has undergone a change. The 
depreciation of money means that it does not represent the 
amount of property which it professes to. The former is an 
economic variation ; the latter an uneconomic diminution. For 
instance, if gold and silver are both used equally as money, and 
their value as bullion is as i to 15, they will circulate as money in 
just that ratio, and every gold coin, of whatever denomination, 
will be equal in value to a silver coin of fifteen times its own 
weight. 



1 62 DEPRECIATION OP MONEY. 

If, however, by lessening the cost of production, the value of | 
silver bullion should fall, so that seventeen grains were only equal 
to one of gold, then the relative purchasing capacity of the two 
coins would be as 17 to i. This would constitute a fall of -f-^ in 
the value of the silver money. But, on the other hand, if the 
quantity of pure silver in the coin were diminished y^^, the pur- 
chasing capacity of the money would fall to the ratio of 17 to i 
as compared with gold, exactly as before, but this would be a 
depreciation of the silver money. Although the alteration in the 
purchasing capacity of the silver money would be the same in 
both cases, the cause and effect of that alteration would be very 
different. In the former case the silver dollar, though diminished ^ 
in purchasing power as compared with gold and all other com- 
modities, would still exchange for the same amount of the prop- 
erty it claimed to represent (silver bullion), showing that its 
reduced purchasing power was due to the fall in the economic 
value of silver, as property. But, in the latter case, the 17 
grains of silver coin would not only have fallen in value as com- 
pared with gold and all other commodities, but also as compared 
with silver bullion, showing that the change is not due to an 
alteration in the economic value of any commodity whatever, but 
solely to the fact that it pretends to contain more property than 
it really does. 

Nor is there any difficulty in determining which of these two 
movements has occurred when a fluctuation in the purchasing 
power of money takes place. If it is a change in the economic 
value of money, then the money will continue to exchange at ; 
par with the specific quantity of the particular commodity which 
it represents. If it is made of gold or silver, the mint price will 
be approximately the same as the bullion price ; and if it is 
paper currency, whether private or governmental, it will exchange ' 
for the amount of coin or bullion, or whatever specific property 
its represents, at its face value. The rise of the bullion pric 
above the mint price, or of the property price above the pape 
price, is infallible evidence of the depreciation of the money 
and the extent of that difference correctly indicates the degree i 
which the depreciation has taken place. 

It should be observed that the depreciation of metallic money 
is produced by a different cause from that of paper money. Thei 



INADEQUACY OF BARTER-MONEY. 1 63 

reason for this is, that the former is barter-, or property-money, 
while the latter is credit-, or representative-money. Metallic cur- 
rency is wealth, and paper currency is the promise to deliver 
wealth ; consequently the appreciation of the former depends 
upon the amount of property it contains, and the appreciation of 
the latter upon the amount of confidence it can command. 
There can never be a depreciation of metallic money unless there 
is an actual diminution in the quantity of property put into it ; it 
may fall in value, but it can never be depreciated so long as there 
is the quantity of material in it which it professes to contain — 
i.e.y if it is not fraudulently manufactured. There is therefore 
no more difficulty in preventing, than there is excuse for pro- 
moting, the depreciation of metallic or property-money. 

If coin were the only money used, the question of depreciation 
might be dismissed as being too simple to need discussion ; but 
this is far from being the case. Experience has shown that, 
under the complex conditions of modern industry, a purely 
metallic, or property-currency, is wholly inadequate to meet the 
needs of the community. There are two reasons for this : (i) 
There is probably not enough gold and silver coin in the whole 
world to do the business of one or two of the most advanced 
countries. (2) If there were, its cumbersome inconvenience 
would render its use impossible in the greater portion of modern, 
commercial transactions. 

To be forced to actually transfer " thirty-six cart loads of 
silver," or its equivalent in gold, in order to transact a business 
of ^{^400,000 — as in the case of the amount paid for the delivery 
of Charles I. to the parliamentary party — would annihilate the 
major part of the commerce of Christendom. The utter in- 
adequacy of metallic, or property-money, for the requirements of 
modern industry, is demonstrated by the fact that only about 
.81 of one per cent, of the business in this country is now done 
with coin, — 99.19 of the payments being made in paper money, 
— 95.13 per cent, of which is in personal checks, drafts, etc. 

Many writers on this subject appear to regard coin as the only 
form of real money. Hence, when distinguishing between metallic 
and paper money they generally speak of the former as money 
and the latter as currency. Even Jevons and MacLeod do not 
entirely escape this notion. In discussing this point the latter 



164 BASIS OF PAPER CURRENCY, 

says : " It would therefore be currency^ but it would not be moneys 
because it has no intrinsic value/' ' — the evident idea being that 
currency is only money in proportion as it contains wealth. 

The simple fact is that all money is currency. Its currency or 
circulation may, under some conditions, depend upon the material 
of which it is made, but it is money by virtue of its being cur- 
rency and not because of the property which it contains. The 
difference between a metallic and a paper currency is that the 
former is both property and money, and the latter is simply 
money. Ricardo has well said : " A currency is in its most per- 
fect state when it consists wholly of paper." ' Indeed, the more 
perfect a currency is as property, the less perfect it is as money. 
Coin of full weight and fineness, instead of being the only real 
money, is the only kind of currency which does not fill all the 
functions of money, — because it is not an instrument of credit 
and does not give currency to transferable obligation, which is 
the most important of all features of money. To the extent that 
money does not transfer credit, it fails to promote indirect ex- 
changes, and reduces all transaction to literal barter. Paper 
money, being simply the evidence of credit and not praperty 
per sg, instead of finally cancelling debts, as coin does, only - 
transfers obligation. Its acceptance and circulation therefon 
depend upon the degree of confidence it inspires in the actual 
fulfilment of the obligation it represents. Whatever impairs the^ 
confidence and destroys the credit, necessarily depreciates thel 
money representing it. Clearly then the only way to prevent the 
depreciation of paper money is to sustain the confidence in thei 
promise it conveys. Nothing can sustain the confidence in 
promise but fulfilling the obligation whenever it is required. T( 
the extent that this is inconveniently deferred is the confidenc^ 
in the promise impaired. 

In order that confidence in this promise may be complete am 
unshaken, it is necessary that those who accept the money kno^ 
that a specific amount of wealth will be delivered on demand, an( 
also exactly of what this wealth shall consist. Otherwise, thj 
debtor would frequently offer what the creditor did not want, an< 
the creditor demand what the debtor could not deliver, and th^ 

* " Elements of Political Economy," p. 35. 

* " Principles of Political Economy and Taxation," p. 218. 



NECESSITY OF GOLD AND SILVER, 1 65 

confidence would constantly fluctuate according to the desira- 
bility of the things offered and received. 

What shall this wealth be, is the next question. Whatever may 
be the commodity selected for this purpose, it must be that which 
already circulates as property-money among that portion of the 
community which will not accept paper or credit-money. The 
reason for this is very simple. Whoever accepts money in a 
transaction does so because the commodities at the disposal of the 
debtor are such as he does not desire. So long as the money 
will be accepted by those who possess the commodities, it is un- 
important what commodity it represents ; but when the pur- 
chaser desires an article which those who have confidence in his 
money do not possess, and those who do possess it will not 
accept his money, it is necessary that he should be able to 
demand from those who issue the promise a specific kind of 
property, which those who declined to receive his credit-money 
will accept. Otherwise his commercial dealings will be restricted 
to the limited area in which his money freely circulates. This 
would necessarily impair his confidence in it as an instrument of 
exchange. So long, therefore, as we have commercial intercourse 
with any people who continue to insist upon property-money, 
all paper, or credit-money, must be a promise to deliver upon 
demand a specific quantity of the commodity of which their prop- 
erty-money is made — be that whatever it may. In no other way 
can the depreciation of paper money be prevented. 

Wherever property-money prevails to-day — and it is used more 
or less in all commercial countries, — it is made of gold or silver. 
Hence these are the commodities upon which all credit, or paper- 
money, musf be based. There are those who think that any other 
commodity would answer the purpose just as well, — and some, 
indeed, who even insist that the aggregate property of the com- 
munity would be still better. Those who urge these views, how- 
ever, overlook the fact that but a very small portion of the race 
have entirely dispensed with the use of property-money ; and un- 
less credit-money is redeemable in some specific commodity which 
is uniformly acceptable to those who insist upon property-money, 
commercial intercourse, with by far the greater portion of the 
human race, would be practically cut off. This would not only in- 
volve the destruction of commerce, but the arrest of civilization. 



1 66 METALLIC MONEY NECESSSARY. 

It should always be remembered that the fundamental princi- 
ple underlying economic and social law is, that all institutions 
are based upon and adapted to the character of the people, be- 
coming less arbitrary and restrictive as the characters of the social 
units rise in moral strength and social integrity, and also that the 
barbaric element in institutions and laws is always retained for 
the least advanced. Thus, all criminal and restrictive laws are 
not made to govern the most orderly but the most unruly element 
in the community. This is why the most moral and advanced 
portion of a community has to be subject to the despotism neces- 
sary to control the most disorderly classes. The same principle 
operates with equal force in the sphere of money. Property- 
money represents the barbaric element in commercial intercourse, 
only the most advanced being capable of using pure credit-money, 
and since property-money is only used by the higher classes be- 
cause it is essential to their dealing with the lower, the commodity 
which is the most acceptable to those who insist upon barter- 
money must be used by those who employ credit-money. 

It is undoubtedly true that any other commodity would serve 
as a basis for credit-money just as well as gold or silver, provided 
it would be as readily accepted among those who insist upon 
property-money. The only reason these metals are necessary is 
that they are the only commodities that will currently pass in 
payment for debt where credit-money is rejected ; and this fact 
makes them indispensable, because, for the very reason that a 
redemption of the promise conveyed by credit-money is neces- 
sary to give it confidence, its redemption in any other com- 
modity would be useless. All money, of whatever it is made, is 
received in trade only on the assumption that other people will 
take it on the same conditions. Since nothing can fill the func- 
tions of money which will not be accepted as currency, and since 
nothing can sustain a paper money from depreciation except th( 
assurance that it will be redeemed in a commodity acceptable as 
currency to those who insist upon property-money, and sin( 
gold and silver are the only commodities that will be so receive< 
it is clear that these metals must necessarily constitute the basj 
of all paper money. 

Section V. — Who Should Furnish the Money ? 

The only interest the community has in the supply of money il 
that it should be furnished by those who can most completelj 



INADEQUACY OF STATE ACTION. 1 6/ 

adjust it to the necessities of the people. Can this duty be per- 
formed better by the government than by private enterprise ? As 
explained in another chapter/ it is a principle in society that the 
efficiency of governmental action diminishes as the enterprise 
becomes involved and complex, requiring quick decisions, expert 
judgment, and frequent changes. Consequently, with the devel- 
opment of society, all forms of industrial and commercial enter- 
prises have gradually passed into the sphere of individual control 
and responsibility. The same is true of money. In the earlier 
stages of society the government supplied all the money. But 
with the development of industry and commerce, the financial 
requirements became too intricate for the government to ade- 
quately supply, and public or legal tender-money had to be 
supplemented by private money. This has increased with the 
advance of society until only about one per cent, of the debts in 
this country are now paid with property-money, and less than five 
per cent, are paid with legal tender-money, about ninety-five per 
cent, of the business being transacted with private money — notes, 
checks, drafts, etc. 

Since personal-money has no legal backing except to the extent 
of the property of those who make it, its utility rests mainly upon 
the confidence that it can be exchanged for any form of property 
desirable or be converted into property-money at the pleasure of 
the holder. Therefore, so long as any property-money is neces- 
sary in the domestic or foreign transactions of a nation, the 
stability of the whole currency rests largely upon its supply, 
however small the amount may be. If the supply of this rela- 
tively small quantity of property-money were as completely 
adapted to the needs of the community as the amount of per- 
sonal-money is to-day, financial panics would be of very rare 
occurrence ; indeed with proper financial statistics they might be 
practically avoided. 

To supply this small but indispensable increment 'of property- 
money to suit the varying requirements of modern society, is a 
duty the government is manifestly incapable of performing. 
The reason for this is easy to understand. Being a representa- 
tive institution, the government must act either upon a general 
rule or according to specific legislation. And the more demo- 
cratic the government, the more its action is limited by the 
* Part IV. , chapter ii. 



1 68 HERBERT SPENCER' S VIEW, 

popular will as expressed in legislation. Consequently it cannot 
vary its action with sufficient promptness and wisdom to meet the 
requirements of special emergencies. When circumstances arise 
making an increase of money necessary, there is no means of 
supplying the demand until Congress can be called together to 
legislate upon it. Before this can be accomplished a stringency 
or even a panic may arise disturbing the industrial relations of 
the whole country — a fact of frequent occurrence. Moreover, 
when Congress is called upon to readjust the currency to the 
commercial needs of the community, the question is liable to be ■ 
decided by political rather than economic considerations.' On 
the other hand, if the amount of money thus authorized is larger 
than is needed, it is uselessly stacked away in the government 
vaults and is a mere waste of public revenue. Financial disturb- 
ances from these causes would be far more frequent than they 
are, but for the large proportion of the money that is furnished 
by individuals. 

Manifestly the remedy for the evils inevitably connected with 
such an inadequate system must be sought in some method of 
transferring the money-supplying function from the State to 
private enterprise. Nor is there any thing revolutionary in this 
proposition. It is simply obeying the law of evolution and trans- 
ferring the duty of making the remaining five per cent, of the 
money to those who, by virtue of superior fitness, already furnish 
about ninety-five per cent, of it. 

It must not be assumed, however, that in taking this position I 
accept the reasoning of Herbert Spencer in his claim for a 
" complete free trade in currency." ^ He assumes that under free 
competition good money will always drive bad money out of use, 
for the same reason that, cceteris paribus, a superior article will 
always be preferred to an inferior one. The objection to this 
assumption is that it does not agree with the facts. The experi- 
ence of centuries shows that, instead of superior money driving 

^ Witness the recent action of Congress on the silver question. The repre- 
sentatives from the silver-mining States demanded the free coinage of silver, and 
for fear of losing the political support of those States a silver bill was passed, 
which on economic grounds would not have received the support of either 
party. 

' " Social Statics," chap. xxix. 



THE GRESHAM LA W, 1 69 

inferior money from circulation, it is always inferior money that 
drives out the superior.' The reason for this is very simple. 

Suppose for illustration that the money is made of gold, and 
that there are in circulation three kinds of dollars containing 
24, 22, and 20 grains of gold respectively. Since the 20-grain 
dollar will do the same service as the 24-grain dollar, every one 
would gain sixteen per cent, by melting down the 24-grain dol- 
lar, it being worth one sixth more as property than as money. 
So long as a profit can be made by converting the superior 
money into property, nothing but the most absolute despotism 
can keep it in circulation as money. Thus free competition in 
money (if more than one kind is used) would produce the 
opposite effect from what Mr. Spencer's laissez-faire hypothesis 
pre-supposes. Moreover, if competition would do all that Mr. 
I Spencer assumes, it would still be uneconomic and hence unde- 
sirable for two reasons : (i) Because competition necessitates a 
j plurality of competitors which implies two or more kinds of 
money in circulation at the same time. (2) Because competi- 
tion between two or more kinds of money necessarily disturbs 
the confidence in some portion of the currency, and this is pre- 
cisely what a sound monetary system should not do. As pointed 
I out in the last section, the community has nothing to gain but 
much to lose by fluctuations in the value of money. 
I There are three important things to be accomplished by a cor- 
irect monetary system : (i) to secure the greatest stability and 
juniformity of value to the money ; (2) to supply it in the most 
convenient form ; (3) to adjust the quantity to the needs of the 
community. Before we are justified in putting the entire control 
of the legal-tender money in the hands of private enterprise we 
must be reasonably certain that all the above objects can be 
laccomplished better by the individual than by the State. 

(i) Since the value of money is governed by the value of the 
commodity of which it is made, and that in turn depends upon 
the cost of production, it is clear that the individual has no more 

^ The principle that bad money drives good money out of circulation aiid that 
yood money never drives out bad, was discovered in the sixteenth century by Sir 
Thomas Gresham, and is known as the " Gresham Law." This theorem has 

een so completely verified by experience that it is now accepted by economists 

nd financiers as scientifically established. 



I/O HOW TO ADJUST THE QUANTITY, 






power to increase its stability than has the government. Nor 
could its uniformity either of value or style be increased if made 
by private concerns. On the contrary, the maximum uniformity 
can best be obtained by having all the money made under one 
management. 

(2) Neither is there any reason for assuming that a more 
convenient form of money could be furnished by private enter- 
prise than by the government. The government will make the 
money of whatever material and issue it in such form as the 
people desire ; and the reasons for a change in these respects occur 
so seldom, and develop so gradually, that no inconvenience can 
result from having these points determined by law. Since private" 
enterprise could do nothing to increase stability of value in 
money or its uniformity and convenience, there is obviously no 
reason for taking from the government the duty of determining 
the material of which it should be made and the form in which it 
should be issued. 

(3) To adjust the quantity of money to the needs of the com- 
munity is a much more difficult task. The quantity of legal- 
tender money required in a highly complex industrial community 
is liable to great and sudden variation. A change in the ratio of 
exports to imports, an increase or decrease in the opening up of 
new territory, or a change in other industrial relations with peo- 
ple who insist upon barter-money, all affect the quantity of legal- 
tender money required. For the reasons already explained, the 
government cannot act with sufficient alertness to adapt the cur- 
rency to these ever increasing variations. The quick decision, 
expert judgment, and rapid changes required are precisely 
what individual enterprise can supply. The question is how to 
transfer to private enterprise and retain in the hands of the gov- 
ernment that portion of the duty of supplying money which each 
can perform better than the other. 

This is not so difficult a task as may at first appear. All th 
is necessary is to have the money furnished by private enterpri 
in the same way that food, clothing, and other commodities no 
are, with the exception that the form and quality of the monej 
be determined by law. This would involve government contn 
or supervision of the mint and the printing of coin certificat 
as at present, the business and risk of buying bullion, the cost 



ADVANTAGES OF PRIVATE ENTERPRISE, 171 

■ minting and distribution being left to private enterprise. Thus 
the business part of the monetary system would pass over to the 
individual, and the duty of protecting the public interest still be 
reserved to the government. Under such conditions the mone- 
tary system would be greatly simplified and far more adjustable 
to the needs of the people. The money would then be furnished 
purely as a matter of business, and the banker would sustain the 
same economic relation to the community as any other merchant. 
And his success, likewise, would depend entirely upon the 
efficiency with which he supplied the wants of the people. 

Should there be an increased demand for money, it would not 
be necessary to petition Congress to pass a law on the subject as 
at present. It would only be necessary for the banker to pur- 
chase more bullion and have it coined or the certificates printed, 
just as the shoe merchant would increase his stock of shoes if the 
demand should rise. To get this bullion would be easy, as soon 
as the terms of commerce in bullion were established between 
bullion producers and bankers. The bankers would then be in 
the habit of ordering bullion from the miners on their established 
credit, just as a man orders clothes from his tailor. Money being 
especially needed, he would telegraph an order to send, say one 
thousand pounds of bullion. This would come on usual terms, 
say sixty days, and could be coined at once and put into circula- 
tion, thereby promptly supplying the demand for money. In other 
words, sound credit would be turned into real money to suit the 
emergency and the evils of a financial panic avoided. The self- 
interest of the banker would inspire prompt action in this re- 
gard, since those who could supply their customers in times 
of emergency would be sure to obtain the greatest amount of 
normal business. No business man would care to deal with the 
banker who was liable to fail him at the time of greatest need. 
More money than is needed would not be made, because nobody 
would have any interest in making it any more than a hatter has 
in making hats for which there is no market. 

One important advantage of this over the present system is, 
that when more money is needed in business, it can be directly 
placed in the hands of those requiring it. If the government 
makes an increased amount of money, it can be put into circula- 
tion only through its expenditures in salaries, pensions, and the 



1/2 REMOVE MONEY FROM POLITICS. 

purchase of bullion and bonds. Hence the banks and the mer- 
chants can only obtain the money through the indirect route of 
business circulation. Whereas, if the money was made for the 
banks instead of the government, it could pass directly from the 
mint or printing-press to the bank, and thence to the manufac- 
turer or merchant who most needed it. Under this system the 
supply of money would be governed by economic law instead of 
political influence. 

The transfer of the money question from the domain of politics 
to that of economics would be beneficial in many ways. In the 
first place, it would remove the banker's excuse for exacting ex- 
orbitant interest, on the plea that the government is responsible 
for a scarcity of money. The banker being responsible for the 
supply, would lose his business by failing to keep up his stock 
just as would any other merchant. In the next place, this change 
would take the gold and silver industries out of politics. Instead 
of lobbying in Congress to increase the market and fix the price 
of their product, the gold and silver men would have to go into 
the open market on the same terms as other producers. Thus 
the success of legitimate public business would not depend upon 
trading for the political influence of the producers of the precious 
metals as at present.^ To adopt the proposition here suggested 
would be to transfer to the individual that portion of the money- 
supplying function which he can perform better than the govern- 
ment, and would retain in the hands of the government that 
portion of the duty which it can perform better than the indi- 
vidual. We would then have in our monetary system all the 
advantage of competition, together with the energy and business 
skill of private enterprise — without the risk of adulteration and 
other " tricks of trade." We should also have all the protective 
power of the state, without the monopoly and bungling incompe- 
tency inseparable from the public administration of business 
affairs. 

^ The recent silver bill was passed chiefly through the fear of losing the polit- 
ical support of the silver-producing States. 



PART III. 
THE PRINCIPLES OF ECONOMIC DISTRIBUTION. 



II 



CHAPTER I. 

THE DISTRIBUTION OF WEALTH. 

Section I. — Distribution hisepar able from Production, 

Distribution is frequently regarded as if it were separate from 
production. In the opening paragraph of his recent work, 
** The Wages Question," Francis A. Walker makes a formal 
division of political economy into the following four distinct 
departments : ** The production, the distribution, the exchange, 
and the consumption of wealth." This naturally encourages the 
popular idea that distribution can be dealt with independently of 
production. 

Although the socializing influence of wealth penetrates all 
phases of society, there are but two economically distinct states 
in which wealth ever exists — namely, that of production and that 
of consumption. Production properly includes every thing that 
directly or indirectly increases the utility of consumable wealth. 

The fact that the manufacturer divides his products between a 
number of wholesale merchants, and these in turn further divide 
them among retail dealers, does not constitute distribution in any 
economic sense. Such division of products into small quantities 
facilitates their delivery to the consumer, and is production. It 
is as incorrect to call a dry-goods dealer, or merchant-tailor, 
a distributer of clothing, as it would be to call the planter of 
wheat a distributer of food. As already explained,' every thing 
which aids in compassing the satisfaction of any human want is 
properly production. 

Consumption is every thing which gratifies human wants and 
desires, whether put to immediate use or reserved solely for that 

* Part II., chap, i., p. 72. 
175 



176 PRODUCTION INVOLVES DISTRIBUTION. 



\ 



purpose by the owners. In economic science therefore, con- 
sumption only applies to the ultimate use of the finished product, 
and never to the use of raw material or tools. We frequently hear 
such expressions as the consumption of pig-iron in the manufac- 
ture of rails, and the consumption of wool in the manufacture of 
cloth. The wool used in the manufacture of cloth is not con- 
sumed ; it has simply changed its form in order to assume a 
higher degree of utility. It ceases to exist as fleece only to 
become broadcloth. 

The wool does not enter a state of consumption until it is in 
the possession of the wearer of the cloth ; all its previous uses 
have served no economic or social purpose except as they have 
been a means to that end. 

There is production, distribution, and consumption of wealth ; 
there are producers and consumers ; but there are no economic 
distributers of wealth. There is no class of persons in the com- 
munity whose distinctive function is to distribute wealth except 
the keepers of charitable institutions and jails. Distribution 
is that automatic phase of economic movement by which wealth 
passes from the sphere of production to that of consumption ; 
that is to say, from those who use it as a means to those who use it 
as an end. The means through which this takes place are wages, 
rent, interest, and profit. The consumable wealth which finds its 
way to the various classes in the community through these chan- 
nels, does so, not as the result of any effort to distribute wealth, 
but solely as a necessary and inseparable part of the process of 
production. Wages in the hands of the laborer are distributed ■ 
wealth, but in the hands of the employer they are capital devoted ■ 
to production. What the employer pays out in wages is invested 
in production, exactly the same as is that which he expends for 
tools and raw material, but when it reaches the laborer it is trans- 
ferred from the sphere of production to that of consumption. 

Economic distribution is neither more nor less than invest- 
ment in production. Production and distribution are inseparable 
phenomena ; the one involves the other, and neither can take 
place without the other ; therefore to talk of production without 
distribution, or of increasing distribution except by promoting 
production, is to ignore economic law ; and any attempt to per- 
manently improve the social condition of any class in the com- 
munity by such means is chimerical. 



USE OF PRODUCTIVE WEALTH. 1 7/ 

The only interest the community can have in either class 
of wealth is that it shall fill its function most effectively, and 
thereby make the greatest possible contribution to social welfare. 
Since it is only in the sphere of consumption that wealth minis- 
ters to human well-being, consumable wealth can only success- 
fully fill its function by being in the possession of the individual 
consumer, as it cannot yield the maximum social benefit for one 
person while under the control of another. 

On the contrary, productive wealth can and frequently does 
render its maximum service to one class while in the possession 
of another. The only concern the community can possibly have 
in the distribution or ownership of productive wealth is that 
it shall be most effectually employed in making consumable 
wealth cheap and abundant. Therefore the idea, so persistently 
propagated by Karl Marx and sacredly cherished by socialists 
everywhere, that it is necessary for the laboring classes to own 
the instruments of production in order to secure the social ad- 
vantage of the product, is an unmixed delusion. Whether or not 
productive wealth should be concentrated in a few hands, or 
j evenly distributed throughout the community, or owned by the 
I government, is absolutely of no importance to the general welfare 
\ except as it may affect the efficiency of its use as a productive 
factor. 

Productive wealth, whether in the form of land, machinery, 
buildings, raw material, or unfinished products, is of no advan- 
jtage to its owner except as it passes into consumable wealth, 
and the possession of consumable wealth does not in any sense 
[depend upon the ownership of productive wealth. 
\ More than eighty per cent, of the consumable wealth daily 
l}iproduced in this country is consumed by those who possess 
|no productive wealth. Since production is impossible without 
consumption, and productive wealth can only confer benefit 
upon its owner as it increases consumable wealth, it follows that 
the concentration and increased efficiency of productive wealth 
tends to promote the general distribution of consumable wealth.' 
There is no fact in the history of civilization which is more 
conclusively established than that every departure from hand- 
labor to factory methods of production, and therefore from dear 
I 

^ Cf. " Wealth and Progress," pp. 7-9. 
12 



178 USE OF CONSUMABLE WEALTH. 

to cheap consumable wealth, has been accomplished by the con- 
centration of productive wealth. Nor could this be otherwise, 
because all the motives that make the concentration of productive 
wealth desirable tend to make the distribution of consumable 
wealth indispensable.^ 

It will thus be seen that, in considering the subject of economic 
distribution, we are concerned only with the movement of con- 
sumable wealth, in regard to which four facts should be recog- 
nized, (i) That wealth never contributes to social welfare 
except when in the sphere of consumption. (2) That no move- 
ment of wealth is distribution which does not transfer it from 
the producer to the consumer. (3) That this distributive move- 
ment is not separate from production, but is an inseparable part 
of it. (4) That the forms in which wealth passes to the community 
are wages, rent, interest, and profit. 

Section II. — The Order of Economic Distribution. 

The order of economic distribution generally held by English 
economists is rent, wages, and profit, thus making the amount the 
laborer receives depend upon what is left after rent is paid. Con- 
sistently with this classification, Henry George declares that rent 
is the great social '' robber," and demands, as the remedy for 
social ills, the confiscation of rent by the abolition of private 
ownership in land. Had he not placed rent first in the order of 
distribution, his reckless misstatement of facts regarding wages ^ 
would have availed him little ; but having made rent the first 
claimant he found little difficulty in declaring that the remaining 
shares would be lessened by that amount, and consequently that 
the wealth of the landowner caused the poverty of the laborer.^ 

During the last twenty years a departure has been made from 
the orthodox position. Jevons, the most prominent representa- 
tive of the " new school " in England, says : " The view which I 
accept concerning the rate of wages is not more difficult to com- 
prehend than the current one. It is that the wages of a working 
man are ultimately coincident with what he produces^ after the de* 



* Cf. article in Political Science Quarterly, vol. iii., pp. 405, 406. 

* "Wealth and Progress," Part II., chapter i., section iii. 
' "Progress and Poverty," pp. 162, 163. 



II 



WALKER'S INCONSISTENCY. 1 79 

duction of rent, taxes, mid the interest of capitals ' Francis A. 
Walker, with an astonishing amount of inconsistency, adopts the 
same classification. After several times alternately affirming op- 
posite positions, he says : " I hold, with Professor Stanley Jevons, 
that wages equal the whole product minus rent, interest, and 
profits." ^ It will be seen that this classification not only places 
rent before wages, as George does, but it places interest and 
profits there also, making wages the contingent amount after all 
else is paid, and thus completely verifying the socialists' charge 
that under the capitalistic system of production, wages are 
merely the leavings after rent, interest, and profit are paid. 
These statements of George, Jevons, and Walker involve two 
errors : one regarding the nature of economic distribution, the 
other the order in which the distribution takes place. 

(i) They all discuss the question of distribution as if it were 
the disbursement of a fixed amount of existing wealth ; hence 
they constantly speak of the " division of the product between 
landlords, capitalists, and laborers " as the " shares of the differ- 
ent claimants," etc. The idea of dividing a fixed quantity of 
wealth involves the assum^ption that if the amount obtained by 
any one class increases, that of the other classes must necessarily 
diminish in the same ratio. This popular error pervades the 
writings of all the schools. Among the English writers it is ex- 
pressed in that familiar statement of Ricardo and Mill, that 
" profits depend upon wages, rising as wages fall and falling as 
wages rise." ' It is no less frankly expressed by Perry in his 
** Rule of Three " discussion of wages," " and by Henry George 

* " Theory of Political. Economy," p. 292. 

^ "Political Economy," p. 284, 1st edition. Compare, ibid., pp. 197, 198 
with 203, 1st edition ; also 254 with 264 ist edition. See also, 262, 263, ist 
edition. 

^ Ricardo's Works, pp. 63, 74, 75, 93. Mill's " Principles of Political Econ- 
omy," vol. i., p. 512. 

^ " There is no use arguing against any one of the four fundamental rules of 
arithmetic. The question of wages is a question of division. It is complained 
that the quotient is too small. Well, then, how many ways are there to make a 
quotient larger? Two ways. Enlarge your dividend, the divisor remaining 
the same, and the quotient will be larger ; lessen your divisor, the dividend re- 
maining the same, and the quotient will be larger." — " Political Economy," 
p. 123, 1st edition. 



l80 FALLACY OF THE RESIDUAL THEORY. 

in his " Tom, Dick, and Harry " partnership illustration. ^ Were 
this view correct, the employing and laboring classes would in- 
deed be the natural enemies of each other, and revolution would 
be the only means of assuring progress, as many ill-informed en- 
thusiasts would have us believe. 

The whole idea of Regarding distribution as mere division is 
erroneous. Economic distribution through wages, rent, and in- 
terest is not the division of wealth that exists, but an investment 
to bring wealth into existence ; hence wages are not related to pro- 
duction as the residual share of a division^ but solely as an antecedent 
cost of production J and since that which each productive factor 
receives is determined by its own cost, the amount it obtains can 
in no way increase or diminish that which any other factor shall 
receive. 

(2) The position of these writers in discussing the order of 
distribution is no less unsatisfactory. Mr. Walker appears to 
think that in being " the residual claimant of the product of 
industry," the laborer has a superior command over the increased 
quantity of wealth which he produces, and says : " In this view 
the laboring class receive all they help to produce " ^ ; and adds : 
" So far as by their energy in work, their economy in the use of 
materials, or their care in dealing with the finished product, the 
value of that product is increased, that increase goes to them by 
purely natural laws, provided only competition be full and free."^ 

By what natural law this increased product " inures directly and 
immediately to their (the laborers') benefit," he does not explain. 
In his " web-of-cloth " illustration, Walker assures us that the la- 
borer is never paid before the manufacturer.* And, in his chap- 
ter on profits, he says : " The fact that these wages are so high is 

^ " To fix Tom's share at 40 per cent., is to leave but 60 per cent, to be di- 
vided between Dick and Harry. To fix Dick's share at 40 per cent, and Harry's 
share at 35 per cent, is to fix Tom's share at 25 per cent." — " Progress and 
Poverty," p. 118. 

' " Political Economy," p. 263, ist edition. 

' Ibid., p. 266. 

* ' ' There remain but two parties as claimants ... on the one side stands 
a crowd composed of persons engaged in the mill ... on the other side stands 
the manufacturer. All that these do not take will be his ; and as piece after piece 
is rapidly cut off, he seems to fear that not enough will remain for him. . . . 
At last the manufacturer is left with his share." — " Political Economy," p. 188. 



walker' S RADICAL ERROR. l8l 

the reason why the employers are unable (other things being the 
same) to realize any profits for themselves." ' If it is true that 
" wages are an essential part of the cost to the employer " and 
must be paid before he can have any profit, they cannot possibly 
be a contingent surplus after profit is made. Either Walker is 
wrong in his " web-of-cloth " and entrepreneur discussion, or his 
doctrine that wages are the " residual claimant " is wholly falla- 
cious. That factor which receives the contingent surplus must of 
necessity also bear the contingent losses ; and this, it is needless 
to say, the wage-receiver never does. 

If Walker can point to any " natural law " by which the in- 
creased production " inures directly and immediately " to the la- 
borer as wages, he will have discovered an economic force the 
existence of which was never before heard of. The fact is that no 
such thing ever occurs, nor can it possibly do so under the wages 
and entrepreneur regime. That an absurdity so obvious to Walked 
when discussing the theory of the " entrepreneur's profits," should, 
within a dozen pages, be dogmatically affirmed as natural law, is 
not a little astonishing. Fortunately for the stability of social in- 
stitutions it can easily be shown that the George, Jevons, and 
Walker classification is radically erroneous. All economic and 
social forces conspire to make wages the first and profit the last, 
in the order of distribution. 

The economic order in which wealth is distributed — as wages, 
rent, interest, and profit — must necessarily follow that in which 
the classes to whom they are paid came into existence. That this 
was the laborer, the landowner, the capitalist, and the entrepreneur 
is an historic fact too obvious to need discussing. 

The economic reason for this is not difficult to understand. 
, There are two facts co-extensive with the human race : (i) that 
; no class will permanently aid in production unless it receives the 
equivalent of the cost of its contribution. (2) That the commu- 
i nity will not continuously pay for a contribution to production 
j which does not yield them as much as it costs. Every change of 
( method or policy, whether economic, ethical, or political, has sim- 
i| ply been an effort to improve existing conditions. Established 
'\ methods and institutions never were, never will be, and never 
I should be abandoned for any other reason. Indeed, were this 

^ " Political Economy,'* p. 241. 



1 82 HISTORIC ORDER OF DISTRIBUTION. 

Otherwise, there would be no certainty in progress and no safety 
to civilization. 

Obviously, then, the only condition upon which primitive man 
would devote his efforts to production is that it would afford him 
a living. It is equally clear that he would not give a portion of 
the product for the use of any new factor unless he could obtain 
a still better living by so doing. For the same reason that no- 
rent land will only be cultivated when it will yield more than can 
be obtained from the chase, rent will be paid for land only when 
it will yield as muth, or more, plus the rent, than could be ob- 
tained from no-rent land. In other words, nothing can make rent 
possible that does not make land yield more than the labor-cost 
of its use. 

As society advances, with the division of labor and the pro- 
duction of manufactured commodities, capital, the third factor, 
begins to be employed in production. The capitalist, like the 
landowner, wants pay for his contribution — tools, machinery, 
buildings, etc. There is no economic force by which he can ob- 
tain any thing by excluding either of the other two factors, namely, 
wages and rent. If he prevents the laborer from receiving a liv- 
ing, his tools and capital cannot be employed. If he demands all 
that remains after paying the laborer, the landowner will refuse 
him the use of the land ; and this also would prevent his capital 
from being used. Clearly, the capitalist cannot prevent the other 
factors from being employed in production ; but either of the 
others can ; and unless he pays their cost they will surely prevent 
him. He is the last comer, and the only way he can be employed 
and receive any thing for his service is, to so increase the aggre- 
gate product that a surplus will remain after paying the other two. 
It is only on condition that the capitalist contributes more to th( 
product than he takes from it that he can become a permanent 
factor in production, and this is precisely what he has alway^ 
done. 

Finally, in the most complex state of society the fourth f actor- 
the entrepreneur class — appears. Under this regime, the divisioi 
of labor and the complexity of productive methods are such thai 
the laborer, and, to a large extent, the capitalist, has no ownershi] 
in the product, but the whole enterprise is conducted by the en- 
trepreneur. He hires all the factors, and takes all the risks and all 



ECONOMIC ORDER OF DISTRIBUTION. 1 83 

the results. Instead of the laborer obtaining the product and 
paying the landowner, the entrepreneur pays the laborer his 
wages, the landowner his rent, and the capitalist his interest. 
Then the whole product is his. If he sells it for more than the 
aggregate cost of these three factors and his own living (which is 
his wages), the remainder is his as profit. If he sells it for less 
than cost the loss is his. Wages, rent, and interest are all indis- 
pensable to the entrepreneur regime of production. None of 
these can be eliminated without destroying the entrepreneur, but 
he can be eliminated and the others remain intact. And so on 
all the way down. The subsequent factors can never produce 
without the preceding ones, but by returning to simpler methods 
the preceding ones can always produce without the subsequent 
ones. 

It is thus evident that, in the progress of society, the factors 
have entered production in the order stated, and therefore eco- 
nomic distribution must necessarily be first wages, then rent, 
interest, and profit. In this order they will be considered in the 
succeeding chapters. 

In the natural order of distribution, the laborer being necessa- 
rily the first to besupplied, the most Utopian scheme ever contem- 
plated could not put him nearer the product than natural law 
has placed him. In studying how to improve his economic con- 
dition the question is not how to change his position in the order 
of distribution, but how to increase the amount which he receives. 
This involves a consideration of the law of wages and will next 
occupy our attention. 



CHAPTER II. 
SOME RECENT THEORIES OF WAGES CONSIDERED. 

Section I. — Dr. Stuart Wood's Theory. 

In a previous work ^ the merits of the three most prominent 
theories of wages then current were considered, namely, the 
Wages-fund theory, and the theories of Francis A. Walker and 
Henry George. Since that time another theory has been presented 
by Dr. Stuart Wood.^ This theory being presented by a scholar 
and a close student of economic science, and propagated through 
the journal of Harvard University, is entitled to consideration. 

He begins by affirming that : *' The market price of labor is 
that price which prevails at any given time in virtue of the 
existing supply and demand. . . . But price can only be in 
equilibrium on the condition that supply and demand are equal." ^ 
Then he proceeds to argue that both commodities and labor are 
used inversely to their price ; increasing as the price falls and 
decreasing as it rises, until the equilibrium between demand and 
supply is reached. He formally presents the law of wages as 
follows : 

" We may state this law of wages in the following terms : The 
price of a given amount of labor is the same as the price paid for the 
use of such amount of capital as would replace that labor in those 
employments where labor and capital are interchangeable and where 
either can be used to equal advantage.'' * 

1 " Wealth and Progress," 1887. 

2 Quarterly Journal of Economics iox October, 1888 and July, 1889; also 
" Publications American Economic Association," vol. iv., No. i. 

* " Publications Americaia Economic Association," vol. iv., No. i, p. 7 ; also 
Quarterly Journal of Economics, vol. iii.. No. i, p. 61. 
^ Ibid., p. 15 ; cf. Journal of Economics, vol. iii., No. i, pp. 68, 71. 

184 



I 



THEORY OF FINAL UTILITY, 1 85 

After nine pages of elaboration he repeats the above formula 
and says : " The same prices, which are paid for such amounts of 
labor and capital as are interchangeable in those occupations 
where they are indifferently employed, are also paid for equal 
amounts of labor and capital in whatever other employment they 
may be engaged in." ' 

It will be seen from the above that this doctrine affirms : (i) 
That wages are governed by supply and demand rising or falling 
until the " supply and demand are equal." (2) That the general 
rate of wages thus determined is fixed by the final (minimum) 
utility of that portion of the supply of laborers " which come into 
use last." ^ (3) That at the wage-determining point, the price of 
labor and the price of capital are identical — />., the amount paid 
in wages and that paid in interest for the same amount of produc- 
tive energy are exactly equal to each other. (4) That the same 
rate of wages and interest that prevails at that point are paid in 
all other employments where capital and labor are jointly used. 

The first proposition is simply a reaffirmation of the wages- 
fund theory. The fallacy of that doctrine has already been so 
completely shown, that comment here is entirely unnecessary.^ 

The second point in this theory is that the rate of wages which 
supply and demand determines, is fixed at the point of the final 
utility of those laborers who are employed last. " The price of 
labor," says Mr. Wood, " is regulated as are the prices of all 
commodities by its final utility ; by the utility, that is, of that 
portion which comes into use last." Here again he affirms a 
proposition without attempting to prove it. Why we should 
believe that the prices of all commodities are regulated by their 
final utility, he does not attempt to show. 

By final utility is meant, that portion of the general supply of 
a commodity which possesses the minimum utility for the pur- 
chaser. For example, suppose in a given community a thousand 
pairs of shoes a week could be consumed, there would doubtless 
be a few who would give $10 a pair rather than go barefooted, 
but there is a certain portion who would go without shoes rather 
, than give more than $2 a pair. The point at which they would 

^ "Publications American Economic Association," vol. iv., No. I, p. 29. 

' Ibid., p. 9. 

^ "Wealth and Progress," pp. 35-52. See also present work, pp. 105-107. 



1 86 WAGES NOT FIXED BY FINAL UTILITY. 

go without shoes rather than pay a higher price, is called the final 
utility of the shoes. The price at which those can obtain the 
shoes, for whom they possess the least utility, will of course be 
that at which all can buy them. The uniform price will thus 
always represent the point of final utility, but it does not follow 
from this that the price is ^^ regulated by the final utility." 'All 
that this proves is that the price-determining point and that of 
final utility are identical. 

A very little examination will show that instead of the final 
utility determining the price, it is more frequently the price that 
determines the point of final utility. If, for instance, the cost of 
producing the shoes should be increased so that they could not 
be made for less than $3 a pair, all those who would buy at $2 
but would not give $3, would have to go without shoes. The 
point of final utility would thus be changed from $2 to $3 a pair, 
and the shoes would only be sold to those who would Tather give 
$3 than go without. On the other hand, if by any improved 
methods of production the shoes could be made for $1 a pair, all 
those who would not give $2, but would give $1 a pair, could 
have shoes, then the point of final utility would at once move 
from $2 to $1 a pair. It is obvious that in this case the price 
would not be fixed by the final utility, but the final utility would 
be fixed by the price, and this is precisely what occurs in every-day 
experience. Clearly then, while the final utility will always be atl 
the same point as the price, it is an error to say that the final 
utility determines the price. This is another of the numerous in- 
stances of trying to elevate a mere truism into a general lawJ 
Like the wage-fund theory, the final-utility doctrine at most onl] 
states a quantitative fact — not a dynamic principle. 

Nor does Mr. Wood make any effort to explain why the point 
of final utility is necessarily fixed by the " portion which comes 
into use last." It is a well-known fact that, in the evolution of 
industry, the accessions to every working group are always 01 
the outer edge of the industrial field. The movement of laborj 
whether slow or rapid, is constantly from barbarism to civiliza** 
tion, from pastoral to agricultural life, from agriculture to manu-j 
facture, and from inferior to superior manufacturing countries 
and localities. Thus we see in England the accessions to th« 
manufacturing districts generally consist of the cheaper laborers 



WAGES no NOT TEND TO UNIFORMITY. 1 8/ 

from the agricultural districts, and in America the accession is 
from the cheaper labor of other countries. In fact the mobility 
of labor is universally towards more remunerative fields of em- 
ployment, and therefore the last increment is always the cheapest 
— i.e.f the poorest. 

Thus if prices determined by the final utility, and the point of 
final utility were fixed by the " portion which comes into use last," 
then wages would necessarily be determined by the poorest labor- 
ers. Moreover, since, according to Mr. Wood's theory, the same 
price which is paid for a given amount of labor at the price-fixing 
point, will determine the price that is paid for a similar amount 
of labor in any other employment, it follows not only that the 
rate of wages in any industry is governed by the cheapest labor- 
ers in that industry, but that the general rate of wages in all in- 
dustries is determined by the poorest laborers in the least remun- 
erative industry. Now this is precisely Henry George's doctrine 
of the " Margin of Cultivation " which we have already shown to 
be contrary to the commonest facts of experience.^ 

If there were any truth in this proposition, wages in all indus- 
tries would be either uniform or constantly tending towards uni- 
formity on the level of the poorest. The wages of the carpenters, 
plumbers, painters, bricklayers, printers, and highest-paid me- 
chanics of New York City would constantly be tending towards 
the level of the lowest continental and Asiatic immigrant and the 
poorest agricultural laborer, which is too obviously absurd to need 
discussing. Instead of wages tending towards a general uniform- 
ity at the lowest point, they are constantly tending towards a greater 
diversity as the differentiation of productive groups or industries 
advances. And, as we shall see in the next chapter, whatever ten- 
dency there is towards uniformity, it is towards uniformity with the 
dearest and not with the cheapest labor in each industrial group. 

The third postulate in this theory is, that at the price-fixing 
point the amount paid in wages and that paid in interest are ex- 
actly equal to each other, and that the same prices are paid for the 
same amounts of either labor or capital in all other employments.^ 
In other words, that the amount of capital which will produce as 

* " Wealth and Progress," Part II., chap, i,, sec. iii. 

' " The same price, whether it is called wages or interest, is paid for that 
amount of labor and for that amount of capital which can supplant each other 



1 88 UNIMPORTANT IF TRUE. 

much as a given amount of labor, will everywhere receive the 
same in interest as the labor does in wages. 

Mr. Wood evidently regards this point as the most important 
in his whole argument, repeating it several times in italics, as a 
formula of the new law of wages.' This is essentially the position 
taken by Marx.'' The only difference is that Marx claims that 
all the product rightfully belongs to the laborer and treats that 
which goes to the capitalist as unjust " exploitation," ' while Mr, 
Wood regards the equal division of the product between the 
laborer and the capitalist as the result of natural law. 

Now assuming this postulate to be entirely correct, what does 
it establish ? what explanation does it afford of the law of wages ? 
If all it affirms is true, it only shows that wages equal interest. 
Wages may equal interest and still be very high or very low. It 
affords no explanation of why wages are lo cents a day in China, 
40 cents in Russia, 60 cents in Germany, $1.25 in England, or 
%2 in America, to say they equal the amount paid in interest. 
Nor is it any advantage to the laborer who is receiving low wages 
to tell him that the income of his employer is at zero. The 
laborer's social welfare depends upon his actual, not his relative, 
income. It is the absolute amount of opportunity, comfort, and 
luxury he enjoys which determines the extent of his social well- 
being, and not whether or not the employer has more or less 
of these things. 

Nor does this theory appear to any better advantage when 
tested by the facts. It should be remembered that by the ex- 
pression, " price of using capital," Dr. Wood means the net gain 
to the capitalist from its use, and not the cost of keeping the 
capital (machinery, etc.) intact, as his language would sometimes 

and render the same services in those industries where their relative superiorities 
merge, or which can in different industries render services equally esteemed by 
effective desire. And the same prices as are paid in these cases for labor and for 
the use of capital are also paid for them in all their other employments." — Quar- 
terly Journal of Economics, vol. iii., No. I, p. 86. 

1 Quarterly Journal of Eco7tomics, vol. iii., No. I, pp. 68, 71, 72, 84, 86; 
ibid,. No. 4, p. 478 ; also " Publications American Economic Association," vol. 
iv.,No. I, pp. 15, 19. 

2 "Capital," chap vii., sec. ii., pp. 166-176. 

' Karl Marx's Doctrine of Exploitation and Surplus Value is considered in 
chapter iv. of this Part. 



THE THEORY CONTRARY TO FACTS. 1 89 

seem to imply.' The statement, that " the price of a given amount 
of labor is equal to the price which is paid for the use of such 
amounts of auxiliary capital as can replace it in those occupa- 
tions where the two things may be indifferently employed with 
equal pecuniary advantage," ' and that " the same prices as are 
paid in these cases for labor and for the use of capital are also 
paid for them in all their other employments,"" affirms: (1) 
that all capital receives interest, the rate of which is the same in 
all employments ; (2) that " the rate of wages or the price of 
using labor " is determined by " the rate of interest or the price 
of using capital." 

The first of these affirmations is so manifestly at variance with 
all industrial experience that it almost seems trifling to discuss it. 
Instead of interest or profits being uniform — ;>., the same " in 
all other employments," the reverse is everywhere the case. In 
all fairly well established industries where any appreciable amount 
of capital is employed, interest or profit varies from zero up. In 
farming and every branch of manufacture there are to be found 
some who are barely holding their own and keeping their capital 
intact. There are many who for years together receive no interest 
for the use of their capital, and frequently some who continue to 
employ it at a net loss, while others in the same business and 
often in the some locality receive five, ten, and sometimes twenty 
per cent, profit. It is exactly at this no-interest point that the price 
of the product is determined * ; and every time this price-fixing 
point is lowered by the use of improved methods of production, 
these no-interest producers are compelled to produce at a loss or 
leave the business. This is the only means by which the price 
of commodities is permanently reduced. It is in this process of 
pushing the price below the plane of the no-interest producer that 

' This point lie makes clear by saying : " But the charges for insurance and 
for renewals, or wear and tear, are not strictly charges for the use of capital, but 
simply a provision to preserve its amount unimpaired, . . . Disregarding, 
therefore, all items of cost of employing auxiliary capital except interest, the 
law of wages assumes this form : The inier-est on capital and the price of labor, 
in all employments , are fixed by the rates paid for their use in those of their actual 
employments in which they are used indifferently,'' t,\.c:. — Quarterly Journal of 
"" Economics, vol. iii.. No. i, pp. 71, 72. 

' Quarterly Jotirnal of Economics, vol. iii., No. I, p. 68. 

* Ibid., p. 86. * Part II., chapter iv., section iii. 



I go WAGES UNLIKE INTEREST. 

small concerns are constantly being " crowded out of business by 
large ones ^ ; and this tendency increases as the use of capital 
and specialization of industry develops and civilization advances. 
Since, in all well established industries subject to free competi- 
tion, there is capital employed which receives a liberal return as 
interest or profits, and in the same industries capital is employed 
for the use of which no interest whatever is paid, it is manifestly 
incorrect to say : " The same prices . . . are also paid for equal 
amounts of labor and capital in whatever other employments they 
may be engaged in." 

Nor is the second affirmation any more consistent with the 
facts. If it were true that the rate of wages is determined by, or 
only equal to, the rate of interest, the rate of wages could never 
exceed the amount paid for the use of the capital representing an 
equal amount of productive force. According to this hypothesis, 
wherever the capital is employed without interest the laborer must 
also work without w^ages. It is unnecessary to say that such a 
state of things is nowhere to be found in the industrial world, not 
even under slavery. In every industry we can find capital em- 
ployed without interest, but in no industry can we find labor 
working without wages. m 

Since capital is frequently used without interest, and labor 
never used without wages, it is manifestly incorrect to say the 
rate of wages is determined by or equal to the rate of in-terest ; 
and since both the rate of wages and interest vary in different 
industries, and vary in different localities in the same industry, it 
cannot possibly be true that " the same prices as are paid in these 
cases for labor and for the use of capital are also paid for them in 
all their other employments ^ 

The only really important point in Mr. Wood's argument is the 
recognition of the fact that capital can only be successfully em- 
ployed when it is cheaper than labor as a means of production, a 
fact hitherto generally overlooked. 

Since social progress chiefly depends upon increasing the 
quantity and reducing the cost of wealth, and this in turn depends 
upon the use of capital in production, a correct understanding of 
the law governing the economic use of capital is of the utmost ,i 

^ Cf. chapter iv. ; also author's article, Political Science Quarterly, vol. iii., 
No. 3, pp. 385-408. 



CONFOUNDING WAGES WITH PROFITS. I9I 

importance to economic science. As already explained/ that 
which undersells always succeeds^ and that which succeeds establishes 
the methods by which its success is accomplished j consequently, the 
principle upon which capital can be successfully employed in 
production is its relative cheapness as a productive factor. 

The fact that " as between two methods of obtaining the same 
result, cheapness is the sole guide," is clear to Mr. Wood, but its 
economic significance he has evidently failed to recognize. Like 
the orthodox economists, he sees that the use of capital is the 
only means of permanently cheapening wealth. And he further 
sees what they did not, namely : that capital can only be em- 
ployed when it furnishes productive force cheaper than labor ; 
but the principle upon which capital becomes cheaper than labor 
he appears to be no nearer understanding than was Adam Smith, 
Gregory King, or Thomas Munn. The chief difficulty with Dr. 
Wood is that he fails to distinguish between the economic 
character of labor and capital and consequently confounds the 
price of labor with interest or profit which are fundamentally 
different. 

The price of labor, like that of all necessary factors in production, 
is determined by its own cost and not by interest, nor any thing 
relating to capital. The use of capital depends upon the cost of 
labor in two ways — its cost as a factor in production, and its 
expensiveness as an element in consumption. While capital can 
never be employed unless it can work cheaper than labor, it can 
only do so when it is accompanied by new employment creat- 
ing conditions which nothing but an enlarged general consumption 
and higher wages can supply. Moreover, a general rate of wages 
and profits in all industries, such as Wood struggles to explain, 
is nowhere to be found. The rate of wages tends to uniformity 
only within specific industrial groups. In such countries as India 
and China and to some extent in Russia and Austria, among 
purely agricultural producers, there is the nearest approximation 
to a general rate of wages, because there industrial differentiation 
is at the minimum. But in proportion as the division of labor 
and the complexity of industrial and social relations increase, a 
general rate of wages becomes impossible, because distinctive 
industrial groups bring different rates of wages into existence, 
^ Part II., chapter i. 



192 NO UNIFORMITY OF PROFITS. 

For example, the wages of spinners, weavers, carpenters, masons, 
tailors, etc., will tend to a uniform rate for each industry in the 
same market or locality, but that uniformity does not extend 
throughout the country. Accordingly, we find that the wages for 
the same occupation in New York City are very much higher than 
in rural districts and country villages, for the obvious reason that 
the cost of supplying the labor-power is greater in the former 
than in the latter places. 

Therefore while wages and prices always tend to a uniformity, 
it is a uniformity for the same quality in the same market. But 
even this is in no sense true of profits ; on the contrary, all the 
force of self-interest and economic law tend to make profits move 
in the opposite direction. The reason for this is very simple. 
Profits being the net surplus after all costs are paid, it is because 
prices tend to a uniformity that a variation in the cost makes 
profits possible, and therefore the greater the variation in the cost 
of production per unit of product, the greater the variation in the 
profits. And conversely the more uniform the cost of production 
per unit, the more uniform and the smaller the maximum amount 
of profit. Instead of profits tending towards a uniformity, they 
tend towards diversity, varying from zero up, in proportion as 
the complexity in productive methods and variety in the cost per 
unit increases. 

Section II. — Professor Clark's Theory. 

■* 

In a recent monograph ^ Professor Clark presents a theory of 
wages which, if not new, has some new features in it. The fun- 
damental point in this theory is, that the price of all factors in 
production is determined by what the last and no-rent increment 
can produce, which when applied to labor is, that the general 
rate of wages is determined by what the laborer could produce 
" empty-handed " or with such land and tools as can be had for 
nothing. 

As a theory of wages this is essentially the doctrine of Henry 

^ A paper on the " Possibility of a Scientific Law of Wages," read before the 
Third Annual Meeting of the American Economic Association, in Philadelphia, 
December 27, 1888. " Publications American Economic Association," vol. iv., 
No. I. 



CLARK'S THEORY STATED. 1 93 

George, which we have shown to be contrary to all experience/ 
Mr. Clark, however, seems to think the fallacies which we exposed 
in the theory of Mr. George are not due to the principle of the 
doctrine, but result from a too restricted application of it. 

i- Instead of limiting the theory to no-rent land, as George does, 
he extends it to no-rent instruments in all departments of the 
social working-field.' This theory affirms : (i) that there is a 
no-rent point at which every productive factor is employed ; (2) 
that this marginal or no-rent place is where the price of using all 

. productive instruments is determined ; (3) that this price-fixing 
portion of the supply is always the last increment that is brought 
into use — hence, "the men who fix the standard of wages are in 

\ the rear rank, not in the front " ; (4) that the wages of the last 

t or price-fixing increment depend upon the proportion between 
the number of laborers and the amount of capital employed ; and 
consequently, that wages can only be advanced in proportion as 
capital increases faster than labor. 

: I. Is it correct to say that there is a no-rent point in the use 

\ of all productive factors ? Something depends here upon what 
is meant by the phrase " no-rent." If by rent he means the cost 
of maintaining the instrument unimpaired, then the statement is 
manifestly incorrect. In this sense a permanent no-rent use of 

i any productive factor is impossible, since its wear and tear would 
soon cause its total destruction. If, however, by rent he means 
that which the owner obtains in addition to maintaining its pro- 
ductive efficiency unimpaired, the statement is unexceptionable. 
Regarding rent in the sense of net surplus, there is unquestion- 
ably a no-rent point at which every productive factor, including 
labor, is employed.'' 

2. Whether or not it is correct to say that the price of using 
the productive instruments is determined at the no-rent (no-sur- 
plus) point, depends upon the sense in which the word " price " 
is used. If by the price of using pj'oductive instrujnejtts is meant 
the expense of maintaining their productive efficiency, which 
^ " Wealth and Progress," Part II., chap, i., sec. iii. 

' " The true margin of cultivation — more accurately that of utilization — is 
not wholly nor chiefly an agricultural thing ; it extends throughout the indus- 

' trial system. . . . There is a margin of utilization in cotton spinning, in 
iron-smelting, in shop-keeping." — Pp. 44, 45. 
^ Part III., chapter iii. 



194 HE COMMITS THE SAME ERROR AS MARX. 

constitutes a necessary part of the cost of production, and is paid 
by the consumer in the price of the product, there can be no 
exception to the statement. But if by the price of using produc- 
tive instruments is meant the rent of land, and the profit or 
interest of capital, or the savings of labor, in short, surplus 
incomes none of which enters the cost of production, then the 
statement would be manifestly incorrect. Instead of these being 
determined at the price of no-rent use, they are always deter- 
mined by variations from it.^ It would indeed be a contradiction 
in terms to say surplus incomes are determined by no-surplus 
uses. 

3. The third proposition will be found to be much less satis- 
factory. In affirming that the last increment added to the supply 
is the price-determining increment. Prof. Clark has made a ques- 
tionable application of his argument. He here confounds the 
last with the dearest increment as if they were quite equivalent 
expressions. In doing this he has committed precisely the same 
mistake that Marx made in following Ricardo and confounding 
the quantity with the cost of labor as the determining factor in 
value. When Ricardo said " the value of commodities is deter- 
mined by the quantity of labor devoted to their production," he 
really meant the cost of that labor. But he erroneously assumed 
that a given quantity of labor always represents the same cost "^ ; 
hence, the cost and quantity at any given time are equivalent 
expressions. Marx literally accepted Ricardo's expression, *' the 
quantity of labor " without regard to its cost, the logical applica- 
tion of which led directly to the colossal error of declaring that 
profits are exploitation of labor, an error which the adoption of 
the other form of expression, ''cost of labor," would have entirely 
obviated.^ 

The position of Prof. Clark is another instance of the same 
kind. Ricardo's theory of rent, which is the evident basis of his 
doctrine, affirms that the last increment of land brought into cul- 
tivation is always the no-rent and hence the price-determining 
portion. The idea he endeavors to apply to the whole sphere of 

1 See Part III., chap. iv. 

^ See " Political Economy and Taxation," ch. i., sec. ii. and iii. 
^ See article on " Economic Basis of Socialism," Political Science Quarterly 
for December, 1889. 






THE LAST-INCREMENT FALLACY. 



195 



price phenomena. He assumes that the price of all productive 
instruments is determined by the no-rent increment, and that this 
is always the increment which is drought into use last. It is here 
that the element of error enters the doctrine and invalidates it as 
a scientific theory of prices, either of labor or of commodities. 
In making the last increment of land the rent-fixing increment, 
Ricardo confounded the last with the dearest increment, exactly 
as in the previous case he confounded the quantity with the cost 
of labor. The real reason Ricardo held that the rent of all land 
was fixed by the last increment brought under cultivation was, 
because he erroneously assumed that the last increment was 
always the poorest and therefore the dearest. Here as in the 
former case he assumed that the two were equivalent expressions 
but always spoke of the "" last." Prof. Clark like Marx accepts 
the literal form rather than the interior meaning of Ricardo's 
expressions and with similarly fatal consequences. 

It can easily be shown that this " last-increment " theory is 
inconsistent with the facts, alike in regard to land, capital, and 
labor. It is well known that Ricardo's assumed order of cultiva- 
tion is entirely unhistoric. Instead of the best land always being 
used first and the poorest last, the reverse order more frequently 
occurs. For instance, when the land brought into cultivation last 
will yield more for the same investment than that already culti- 
vated, as is often the case, the price of the product will not fall to 
the cost of production on this last land, because in that case all 
the previously cultivated land would be thrown out of use by 
making the price so low as to render its cultivation impossible. 
If the product of all the land under cultivation is needed, the 
price must be high enough at least to enable the poorest portion 
to be cultivated without paying rent. Thus while the poorest 
portion will be the price-fixing and no-rent increment, it will not 
be the last, but the last increment, being the best or better than the 
poorest, will be a rent-paying and not the price-fixing increment. 

Having confused the last with the dearest increment. Prof. 
Clark's argument from this point on, like that of Marx, leads 
directly to error in proportion to the consistency with which it is 
pursued. 

He says "it is a familiar commercial principle that the last 
increment of the supply of any commodity fixes the general price 



A NEW ELEMENT OF CONFUSION, 



of that article." Instead of that principle being familiar i 
commerce and manufacture, it is even less true there than in the' 
case of land. There is no fact better established in the history 
of manufacture than that it is the oldest, poorest, and hence the 
dearest machinery and methods which yield no profits. It is the 
water-wheel factory, the small mules and slow looms that occupy 
the no-profit or minimum profit position. The new factories 
with the most modern improvements are those which yield the 
greatest profits, because they can sell at the same price while 
producing at a less cost than their price-fixing competitor. 
In manufacture and commerce, therefore, instead of being the 
last it is usually the first or oldest instruments in use which 
fix the price ; but whether the oldest or newest, it is always 
the dearest. 

According to the last-increment theory, wages will always be 
determined by " the last laborers added to the social working 
force." ^ If we observe the history of the mobility of the laborer 
whether it be from industry to industry, from locality to locality, 
or from nation to nation, we shall find, except in a few rare 
instances, that those who enter any given working field last are 
the most inexperienced, incompetent, and poor. It is the effort 
to improve their condition that induces people to change their 
country, locality, or occupation. That is why emigration is always 
from lower to higher wage-paying countries, why mechanics 
seldom become farmers, but agricultural laborers are constantly 
entering the factory and farmers' sons deserting the farms for the 
cities. The laborer who leaves his country or industry may be 
and probably often is one of the dearest of the class he leaves, but 
he is usually among the cheapest in the class he enters. If the 
poorest laborer fixed the wages when a new man entered any 
class, the wages of all in that class would fall to his level. 

The statement that the standard of wages is fixed by " the actual 
product created by . . . the men who run no-rent machinery " ^ 
introduces a new element of confusion. The men who run the 
no-rent machinery are not necessarily the last comers in that in- 
dustry. This is really confounding the price of the laborer with 
that of the product. Other things being the same, the use of the 
poorest instruments will determine the no-profit and price-fixing 

* " Possibility of a Scientific Law of Wages," p. 49. ^ Ibid., p. 49. 



k 



CONFOUNDING WAGES WITH RENT. 19/ 

point of commodities, because in that case the quality of the in- 
struments affects the cost of production. But this is not true of 
labor ; since the instruments are not used in producing labor- 
power, its cost, and hence its price, cannot be affected by their 
quality. As productive instruments are only used in creating 
commodities, it is the price of commodities alone that can be 
affected by the quality of such instruments. The price of the 
instruments may have been affected by that of the previous labor 
which was employed in their production, but when used as in- 
struments in production in conjunction with labor they are both 
simply items in the cost of producing a future product, whose 
price is fixed by them and not theirs by it. For the same reason 
that the price of raw material is not determined by the finished 
product into which it enters, but by the price of what enters into 
it, the price of labor power does not depend upon the price of 
what it produces, but upon the price of what it consumes — i.e.^ 
the cost of its own production. Upon no other principle would 
the product made by the poorest tools be the dearest, and hence 
the no-profit portion. 

Therefore, instead of the price of labor being determined by 
the quality of the instrument it uses, it is the price of the result- 
ant product only that is so affected. The fact that the entrepre- 
neur who uses the poorest tools has to pay wages as high as 
those who use the best, prevents him from having any profit. As 
a matter of fact the laborer's wages do not grade up and down 
according to the superiority and inferiority of the instruments he 
uses. It is only profits which thus vary, and the reason they do 
so is because wages do not. 

Another source of confusion is the mistake of regarding wages 
as sustaining the same relation to labor that rent does to land 
and that profit does to capital. This it will be remembered was 
one of the chief errors in Dr. Wood's argument, and Prof. Clark 
seems not entirely to have escaped it. Although for a time he 
seems to treat wages as identical with prices, in his grand formula 
he treats wages as governed by the same law as profits and rent,^ 

^ ' ' The earnings of capital (profits and rent) are subject to identically the 
same law as those of labor ; they are fixed by the product of the last increment 
that is brought into the field." — " Possibility of a Scientific Law of Wages," 
p. 53. 



198 PRICE AND SURPLUSAGE, 

which is entirely erroneous. In the use of both capital and land, | 
that which is necessary to replace the wear and tear is not profit 
or rent but necessary cost. It does not go to the owner of the 
land or capital, but is all consumed in maintaining its productive 
efficiency. Wherever land or capital is employed, and the prod- 
uct is only equal to this necessary cost, there will be no profits 
or rent. In the case of labor all this is different. All the laborer 
receives is wages, whether it is cost or surplus. Whether tht 
laborer receives what will barely maintain his economic efficiency 
or a third more than that amount it is all wages because it is all 
in the price of his labor. 

In every class of labor under wage conditions there are som( 
laborers who work at the bare cost point, and others who have 
surplus. There is also land that is used at cost point and yieldi 
no rent or surplus, and land that yields a rent.^ So too of capij 
tal ; there is some that is used without profit and some thj 
yields a profit. Now those laborers who have no surplus abov^ 
their cost of living receive wages, and as high wages too as thos| 
of their class who have a surplus. But the owners of land an( 
capital which only yields the cost of their use do not receive 
surplus as rent or profit. To say profit and rent are governe( 
by the same law as labor is to confound the law of prices witl 
the law of surplus. Wages are the price of labor and are gov^ 
erned by the same law as the price of land, gold, or shoes 
Profit and rent, like the laborer's savings, are all surpluses an( 
are governed by the law of surplus. The correct statement 
therefore is this : the surplus or savings from wages, rent of lane 
and profit of capital, are all governed by the same law — the la\ 
of economic surplusage ; and the wages of labor, the price ol 
land, and of commodities are governed by the same law, namel] 
the law of economic prices. 

4. The fourth proposition is the natural outcome of the thirc 

^ In using the expression " no-rent," the existence of no-rent land and nc 
profit instruments, is assumed. If however a state of society should be reache 
where no-rent land does not exist, that would not in the least militate agaii 
the law. It would then be the mini?num-rQnt land or tools that occupy thi 
price-fixing position. Indeed the prefix " no " should always be taken to meail 
" minimum." Then where no-rent land or capital exists the statement is cor^ 
rect, and where they do not exist it is the minimum-rent land or capital that 
referred to. 



DEFECTS OF CLARK'S THEORY. 1 99 

The doctrine which makes the laborer's income depend upon the 
quality of his tools naturally leads to the conclusion that wages 
depend upon capital. Hence it is not surprising that Mr. Clark 
falls back into the fold of pure wage-fundism which makes the 
progress of the laborer subsequent to and dependent upon that 
of the capitalist. He says : " The sole hope of this multitude 
(the working class) lies in an advance of the margin of the field 
of capital, and in the retirement of the margin of the field of 
labor. By this twofold action only can wages rise with great 
rapidity, but the movement of its margins is possible only by 
means of a considerable excess of the supply of capital unbal- 
anced by labor." ' This contains the essence of about all the 
heresy of orthodox economics. It makes man depend upon 
wealth instead of making wealth depend upon man. 

Whatever the merits of this theory may be, it has three serious 
defects : (i) in assuming that prices are determined by the last 
instead of by the dearest increment of the supply ; (2) in treat- 
ing wages as a share of the division of the product instead of a 
necessary item in the cost of its production ; (3) in putting wages 
in the same economic category with rent and profit instead of in 
the category of prices. The natural result is to confound wages 
v/ith profits, misplace the price-determining factor, and finally 
invert the economic relation of capital and labor. 

^ " Possibility of a Scientific Law of Wages," p. 59. 



CHAPTER III. 

THE LAW OF WAGES. 

Section I. — The Test of a Scientific Law of Wages. 

A SCIENTIFIC law of wages must afford a rational explanation 
of all normal wage phenomena. It must explain what wages 
are, why they are paid, and how their amount is determined. It 
must explain why the rate of wages varies in the same industries 
in different countries and localities, and why it differs in different 
industries in the same localities ; why the wages in agriculture 
are always lower than those of manufacturing industries in the 
same country ; why in the same industries and localities the 
wages of women are lower than those of men ; and why in all 
industries a portion of the laborers can save money while others 
of their class can scarcely make both ends meet. In proportion 
as any theory fails to account for these constantly recurring 
facts, it must be deemed insufficient to explain the economic law 
of wages. 

In considering the theories of others I have applied this test, 
and to the extent that they fail to fulfil its requirements, I have 
not hesitated to pronounce them incomplete or unsound.^ All 
that I ask is that the theory presented in this chapter shall be 
judged by the same standard ; and if it fails to fulfil the require- 
ments exacted from others, it must share the same fate, and vice 
versa. In order to avoid confusion it is important at the outset 
that we definitely understand what the term wages is intended to 
mean. 

^ The criticism of the wages-fund theory, Professor Walker's theory, and 
Henry George's theory will be found in "Wealth and Progress," Part II., 
chap. i. ; and that of Dr. Wood and Professor Clark in the preceding chapter. 



CHARACTER OF THE WAGES-SYSTEM. 201 

Section II. — Definition of Wages. 

In the first place, the phrase wages has no economic meaning 
except under wage conditions ; that is to say, under conditions 
where the laborer's income consists of a specific amount paid by 
another for his service as such. Strictly speaking, wages are 
economically the price of labor. For instance, if a man works for 
himself, and either sells or consumes the product of his labor, 
what he receives will not be wages ; it will be the result of his 
labor, but that will consist of the product he created, whether 
little or much, good or bad, or indifferent, but it will not be the 
price of his labor. Nothing can properly be regarded as having 
a price which is not subject to the conditions of exchange — />., 
is not bought and sold. When a man owns and sells the products 
of his labor, the product has a price but his labor has not, because 
as labor it has not entered the sphere of exchange, and hence is 
not subject to the law of prices. 

So too in slavery, where the laborer owns neither his labor nor 
his product. Here the product is bought and sold, and hence 
has a price, but the labor-power as such is not exchanged ; it is 
the laborer himself that is bought and sold. We do not buy the 
labor of the horse or the engine. It is true that the motive for 
buying the horse or engine is to obtain their productive power, 
but in order to obtain that power we have to buy that in which 
it is produced. Under slavery the laborer is economically iden- 
tical with the horse or the engine. It is he and not his labor- 
power that is bought and sold. The difference in the two 
systems, then, may be stated thus : under slavery the laborer is a 
commodity ; under the wages-system it is only his labor-power or 
service that is a commodity. With this change came a marked 
social distinction ; under wage conditions, the capitalist, instead 
of buying and selling laborers as under slavery, buys service and 
sells products, and the laborer sells service and buys products. 
Thus the laborer ceases to be a commodity and becomes a distinct 
social unit who buys and •sells, and economic price is transferred 
from his personality to his labor-power. It is only under condi- 
tions where the laborer is personally, socially, and politically free 
' and sells his service as such, that wages can properly be said to 
exist. The price at which service under such conditions is sold 
by the laborer is wages. 



202 REAL AND NOMINAL WAGES, 

It is therefore not the amount received, but the way in which 
it is received that constitutes it wages. Whether the amount be 
a hundred dollars a year or a hundred dollars a week makes no 
economic difference. There is nothing in the nature of wages as 
such to prevent them from being increased to any amount. The 
essential characteristic of wages is that they constitute a definite 
as distinguished from a contingent income. It will be observed 
that this definition of wages includes the incomes of all, without 
regard to sex or social status, who sell their service for a stipu- 
lated amount. The term wages, then, as it will be used through- 
out this book, means neither more nor less than \\\^ price of labor. 

In the text-books there is usually considerable discussion about 
nominal and real wages. This, however, need detain us but 
a moment. Nominal wages simply mean the price that is paid 
for a given amount of service expressed in the currency or money 
of the community. Real wages mean the actual amount of 
wealth or social well-being obtainable for a day's labor. Nominal 
wages are of no special account except as a mode of expressing 
real wages.^ In considering the law of wages, therefore, the 
question is not how is the laborer's income determined when he 
works for himself, nor how it is determined when he is personally 
the property of another, but how his income is determined when 
he voluntarily sells his service as service. What the employer 
pays to the laborer is not in any sense a division of the product, 
but it is wholly an expenditure in purchasing the means of pro- 
duction. Thus labor (not the laborer) is in exactly the same 
economic category as raw material, machinery, or any other pro- 
ductive factor. For instance, when the manufacturer has pro- 
duced a thousand yards of cotton cloth he does not divide it 
with his laborers either practically or theoretically ; on the con- 
trary, all the wages for producing that cloth, including those 
involved in producing the raw material and machinery, have 
already been paid. They constitute a part of the cost, and hence 
the value of the cloth. Whether or not the manufacturer will 
gain or lose by the transaction is a subsequent matter, and 
entirely depends upon whether he can produce the cloth at as 
small a cost as his most incompetent competitor. 

The economic claim of the laborer therefore is to a definite 
price for his labor, and not to a proportional share of the prod- 
1 " Wealth and Progress," pp. 75, 76, 96, 97, 98. 



WAGES THE PRICE OF LABOR. 203 

uct. This really constitutes the economic difference between 
wages and rent, interest and profit, and is the distinction already- 
pointed out between price and surplus. If the laborer were a 
claimant to a given proportional share of the product, the size 
of his income would depend upon the quantity produced, and 
would thus become a contingent instead of a stipulated amount. 
In short he would be working in partnership and not working for 
wages. As before stated, the essential characteristic of the 
wages system is that the laborer is not a commercial partner ; he 
has no ownership in the finished product. His economic posi- 
tion is to sell labor and buy products^ and that of the entrepreneur 
is to buy labor and sell products. Obviously then the laborer sells 
his productive power to the employer at a stipulated price ; he 
has no more claim to a proportional share of the product than 
have those who sell raw material or machinery. The law of wages, 
then, is the law of the economic price of labor. 

Therefore, in considering the law of wages the question is not 
what proportion of the product belongs to the laborer, but how 
the price of his labor is economically determined. When we 
have discovered the law by which the price of labor is governed, 
we shall be in a position to consider how that price (wages) can 
be increased. 

Section III. — The Law of Wages. 

One of the essential conditions of a scientific law of prices is 
that it must be applicable to all price phenomena. Wages being 
simply the price of labor, must be governed by the same law 
as the price of commodities. Consequently if the formula of the 
law of prices presented in a previous chapter ^ is correct, we have 
only to apply that theory to labor in order to find the economic 
law of wages. If it does not explain the movement of wages as 
completely as it accounts for the price of commodities, we may 
safely conclude that it fails to fulfil the requirements of a scientific 
law. 

This law it will be remembered is : That economic prices con- 
stantly tend toward the cost of furnishing the most expensive portion 
of the necessary supply in any given- market ; and that this tendericy 
increases directly as the impediments to free economic movement are 
diminished. 

1 Part II.. chap. iv. 



204 



ECONOMIC LAW OF WAGES. 



Applied to labor then, this law is : That wages te7id to 7nove 
towards the cost of furnishing the 7nost expensive portion of the neces- 
sary supply of labor -power in any given market ; and that this ten- 
dency increases directly as the individual freedom and mobility of the 
laborer advances. 

By the cost of a thing is meant not what it may have cost 
somebody else or would cost under any other conditions, but 
v/hat its owner actually gave for it or would have to pay to re- 
place it. The cost of labor-power then, is what it cost the laborer 
to furnish it. Obviously the cost of labor-power to the laborer is 
the cost of his maintenance or living. The cost of the laborer's 
living, however, is not limited to the simple maintenance of the 
individual laborer, but it includes all that enters into the neces- 
sary expenses of his social life. Since the maintenance of the 
family of the married man is as much a part of his necessary cost 
of living as his individual food and shelter, it is an indispensable 
item in the cost of supplying his labor power. Therefore the fam- 
ily and not the individual is the economic unit in the labor market. 

The law of wages then, may be more correctly stated thus : 
The rate of wages in any cou7ttry, class, or industry constantly tends 
towards the cost of living of the most expensive families ^ who furnish 
a necessary part of the supply of labor in that country, class, or in- 
dustry, as shown in the following diagram : 



NO. I. 



o c. 


$2 


5 c. 


|2 


lO c. 


$2 


15 c. 


$2 


20 C. 


$2 


25 c 


$2 



Savings, 



Wages. 



Maximum cost %2 

|i^| 

. . . - . $i-9o| 

$i-o5 Source 

$1.80 1 of 

Minimum cost . $1.75 I Savings. 



Actual Cost. 



Cost Reduced 

BY 

Cheap Living. 



The reason wages in any class or industry are thus adjusted tol 
the standard of living of the most expensive families is exactly 
the same as that which we saw caused the price of commodities 

^ By the most expensive families is not meant the most expensive single] 
family, but the most expensive ten or twenty per cent, of the class whose labor] 
is required. 



COST OF LIVING THE BASIS OF WAGES. 20$ 

to be adjusted to the cost of producing the most expensive por- 
tion of the supply. We saw that the price of commodities tends 
to a uniformity, because the lowest price at which one producer 
would sell was the highest at which the consumer would buy. 
This uniformity, through the pressure of the consumer to buy at 
the minimum, tends to be adjusted at the lowest point the pro- 
ducer can afford to sell, which is at cost. And since the price 
tends to uniformity at cost, wherever the cost varies, the uni- 
formity necessarily takes place at the cost of the dearest incre- 
ment. 

This is equally true of labor, and for precisely the same rea- 
son. Upon the same principle that the producer cannot or 
will not consent to continuously sell a commodity for less than 
it cost him to produce it, or than it will cost him to replace it, 
the laborer cannot or will not long consent to sell his service for 
less than it costs him (and his family) to live. He will, as ex- 
perience shows, often work for less than would supply him with 
exceptional comforts and^ luxuries, but he will not continuously 
work for less than will furnish him with those things which by 
constant repetition and the force of habit have become necessi- 
ties. Rather than forego these he will refuse to work, and will 
inaugurate strikes, riots, and other means of endangering the 
peace and prosperity of the community. 

If two dollars per day is the minimum amount upon which a cer- 
tain portion of a given class of laborers can or will consent peace- 
fully to live, then that amount must be paid them in order to ob- 
tain their labor. What the most expensive portion of a given class 
must receive, the others may and will receive. We know that the 
general rate of wages in the same industry and locality is nearly 
uniform. We know, for instance that weavers, spinners, shoe- 
makers, carpenters, bricklayers, etc., working in the same shop 
or factory or on the same job, get the same rate of pay for work 
at their respective trades whether they are single or married, have 
large or small families, or live more or less expensively than their 
fellow-laborers. We also know, for reasons already given, that 
the most expensive among them must obtain for his service what 
will supply his family with what they regard as necessities. What 
will be sufficient to supply the urgent necessities of the most ex- 
pensive portion of any class of laborers, to induce them to con- 
tinue to work, will furnish all those whose cost of living is less, 



206 



RELATION OF CAPITAL AND LABOR. 



with a margin proportionate to the difference which may be saved 
or spent in what to them are luxuries. 

Thus through the law of price uniformity, by which the cost of 
producing the most expensive portion determines the general 
price of the commodity in that market, the minimum amount 
upon which the most expensive laborers in any class or industry 
will consent to live and continue at work, determines the rate of 
wages in that class. 

There is one important distinction, however, between these two 
classes of price phenomena which should not be overlooked. Al- 
though all prices are governed by the same general law, the price 
of commodities and of labor move in opposite directions. While 
the dearest capitalist and the dearest laborer both fix the prices 
for their class, they occupy relatively opposite positions. The 
manufacturers who furnish the most expensive portion of the sup- 
ply of commodities are the poorest and lowest in their class, while 
the laborers who furnish the most expensive portion of labor- 
power are the best and highest in their class, as shown in the ac- 
companying diagram : 

NO. 2. 



I 



Profit. 



t.c- 
o c. 



Price. 



4 c. 
4 c. 
4 c, 
4 c. 
4 c. 
4 c. 



Actual Cost. 



Cost Saved 
BY Capital. 



Minimum cost ... 3c. Source 

. . sic. I of 

3|c. Profits. 

3fc. I 

3ic. |_ 

Maximum cost 4c. 



o c. 

5 c. 
10 c. 
15 c. 
20 c. 
25 c. 



|2 
$2 
$2 
$2 
-1^1 



Maximum cost . 


_______ ^ ifeo. 


ii.Q'; 


$I.QO 




. <lkT.8o 1 _r 


Minimum cost . 


• $1-75 1 Savings. 



Saving; 



Wages. 



Actual Cost, 



C(\st Reduced 

BY 

Cheap Living. 



1 



DEARER LABORERS HELP THE CHEAPER. 20/ 

Here it will be observed the movements are all exactly the 
same as in the case of commodities (diagram No. i), but the 
relative positions of all are reversed. Laborer A, like capitalist 
A, is the dearest. His labor-power cost him $2 a day, and he 
sells it for $2 a day, and has no surplus ; but instead of being at 
the bottom of his class, he is at the top. The wages of laborer 

A, like the price of manufacturer A, are the same as, and fix, 
those of all the others. Just as the cost of living of the laborers A, 

B, C, D, E, and F recedes from the cost line of A on the right, 
does their net-surplus (or the possibility of it) increase in the 
savings column on the left. That is to say, in proportion as any 
of the other laborers live upon less than A they are enabled to 
sell their labor for more than it actually cost them. And the dif- 
ference, which in the case of the entrepreneur was profit, consti- 
tutes a net-surplus for the laborer either to be saved, expended 
upon luxuries, or for any purpose whatsoever. Thus the lowest 
laborers are enabled to obtain wages higher than the cost of their 
own labor, because the dearest laborers are compelled to demand 
a higher price for their labor-power in order to obtain the equiva- 
lent of its cost. 

The relative positions of the laborer and capitalist being the 
inverse of each other, it will be seen that it is the most advanced 
laborer and the poorest capitalist who have no surplus. The rea- 
son for this is that in the progress of society the movement of 
the price of commodities is downwards, while that in the price of 
labor is upwards. That is to say, the dearest laborer occupies the 
top and progressive position, while the dearest capitalist occupies 
the bottom and receding position. The surplus of the less 
expensive laborers is the advantage they receive from the struggles 
of their most expensive brethren. We have thus a law of wages 
which is not limited to any special industry, country, or period, 
but whose application is as universal as the existence of wage 
conditions.^ 

If wages are governed by the cost or standard of living, it will 
of course follow that wages will always be the highest where the 
socially established standard of living among the laborers is the 
most complex and expensive ; and, conversely, they will be the 

' See chapter on the Universality of the Law of Wages. " Wealth and 
Progress," p. 162. 



2o8 WAGES IN DIFFERENT COUNTRIES. 

lowest where the standard of living is the most simple and in- 
expensive, — and this is precisely what we find the world over.' 
We no sooner recognize this than the reason why the wages of 
the Asiatic are lower than those of the European becomes obvi- 
ous. The same difference, and for the same reason, exists 
between wages paid in similar industries in Continental countries 
and in England, and between those in England and America. 
The testimony of history is, that in all countries wages in the 
same industries have always been higher in large cities than in 
small ones, and so has the cost of living, which generally implies 
greater social advancement and general intelligence. 

This view is further emphasized by the fact that the industrial 
centres of the world have, from the dawn of human history, been 
the birthplaces of freedom and the nurseries of civilization.'^ 
Upon this principle we have no difficulty in understanding why 
the wages of agricultural laborers are always lower than those of 
mechanics, and why, as is universally the case, agricultural wages 
are higher in the vicinity of large cities and towns than in out- 
lying districts.^ It is because the wants of the agricultural class 
are fewer, their social life simpler, and their standard of living 
lower. As a necessary part of this same fact, we find that agri- 
cultural laborers are always in the rear ranks of social advance- 
ment, and are the last to acquire industrial and political rights. 

The difference between the wages of women and those of men 
in the same industry is due to the same cause ;. it is an entire 
mistake to assume, as some do, that the lower wages received by 
women are due to their inferior ability. If wages were determined 
by the skill and competency of the laborer, then the carpenter, 
mason, painter, or compositor in the country town with equal 
skill would get the same wages as those in the large cities. And 
laborers of equal skill in different industries in Pekin, Tokio, St. 
Petersburg, and Constantinople w^ould obtain the same wages as 
those in New York City, whereas we know that the common 
laborer of New York obtains higher wages than the most skilled 
mechanics in most of the former places. 

Nor are the lower wages of women caused by difference in sex, 

1 " Wealth and Progress," Part II., chapters iii. and vii. 

"Parti., chapter V. Also, "Wealth and Progress," pp. 116-119. 

' "Wealth and Progress," pp. 163-166. 



SA VINGS-BANK DEPOSITS. 209 

since in that case the wages of men everywhere would be higher 
than those of women anywhere, which is by no means the case. 
The wages of women in America are as high as those of 
men in the same industry in any other country, and, with the 
exception of England, and perhaps Paris, are actually higher. 
Obviously, then, the wages of women, like those of men, do not 
conform to the fact of personal skill nor to that of sex, but they 
do everywhere conform to cost of living. As elsewhere shown, ^ 
the average woman's cost of living is very much smaller than 
that of the average man, and her wages are correspondingly 
lower. The wages of women are lower than those of men for the 
same reason that the wages of agricultural laborers are lower than 
those of mechanics in the large cities, and wages for the same kinds 
of labor in Moscow or Constantinople are lower than in Paris, 
London, or New York. In short, the wages of women are gov- 
erned by the same law as those of men, namely, the cost of 
living, and the only reason the wages of women are lower than 
those of men is because women cost less. 

Another fact, of which no theory of wages hitherto presented 
affords any satisfactory explanation, is the savings-bank deposits 
of wage-earners. Since these deposits — to the extent that they are 
saved from wages — represent a net-surplus above the necessary 
cost of living, they are usually taken as conclusive evidence of 
high wages. They are frequently treated as a kind of wage 
thermometer, the rate of wages or social condition of the laborers 
being regarded high or low as savings-bank deposits are large or 
small. The correctness of this conclusion is commonly accepted 
as self-evident, and it is frequently cited as a conclusive proof 
of the wisdom of an existing or proposed industrial or political 
policy. 

The last presidential election in this country (1888) may be 
cited as an example of this. In order to show the striking contrast 
between the wages and social conditions of the laborers in this 
country and England, one of our most popular statesmen cited 
the fact that the savings-bank deposits in Massachusetts, with 
2,000,000 population, are nearly two thirds as much as those of 

^ For the further discussion of this point and the facts relating to the wages 
and the cost of living of women, the reader is referred to " Wealth and Prog- 
ress," pp. 172-178. 
14 



2IO SAVINGS NO CRITERION OF WAGES. 

Great Britain with a population of 38,000,000, or over eleven || 
times as much per capita of the population. This statement was 
accepted as showing the difference in the wages and material 
prosperity of the laborers in the two countries. A more mis- i 
leading statement it would be difficult to imagine, as a little exam- 
ination of the subject will conclusively show. 

Although the economic and social conditions of the American ; 
laborer are decidedly superior to those of his English brother, 
this fact cannot be established by savings-bank statistics. Nor 
is the difference between the wages in the two countries any- 
where near so great as the difference in the amount of savings- 
bank deposits would indicate. If we compare the savings- 
bank deposits of the different States in this country the utter 
worthlessness of such data, for showing the difference in the rate 
of wages, will at once be apparent. 

According to the official savings-bank statistics in 1887, the 
deposits per capita of the population were : in Rhode Island, 
$169.41 ; in Massachusetts, $147.30 ; in Connecticut, $147.18 ; 
in New Hampshire, $125.52 ; in New York, $89.05 ; while in 
Pennsylvania they were only $10.81 per capita. In Ohio they 
were $4.32, in Minnesota $2.17, and in Wisconsin only .02 cents, 
and in a large number of the Western States there are no 
savings-banks at all. Now, if there is any virtue in savings- 
bank statistics as indicating the rate of wages and the industrial 
condition of the community, the laborers in New York State are 
only a little over half as well off as those in Rhode Island, and 
less than two thirds as well off as those in Massachusetts, Con- 
necticut, or New Hampshire, while in Pennsylvania the condition 
of the laborer would only be about one sixteenth as good as it is 
in Rhode Island. 

According to this notion the laborers of Italy are as well off as 
those in Pennsylvania, and vastly better than those of Ohio, Il- 
linois, Minnesota, Wisconsin, or any of the Middle and Western 
States, except California. A theory by which $4.32 per capita in 
Ohio, $2.17 in Minnesota, .02 cents in Wisconsin, and other 
Western States, as compared with $169.41 per capita in Rhode 
Island, are taken to represent the wages and social condition of 
the laboring classes in those States, bears upon its face the evi- 
dence of its own absurdity. Why the laborers of Rhode Island, 



THE SOURCE OF SAVINGS. 211 

Massachusetts, Connecticut, and New Hampshire should be able 
to save a third more per capita than those in New York/ fourteen 
times as much as those of Pennsylvania, thirty-four times as 
much as those of Ohio, sixty-eight times as much as those in 
Minnesota, and several hundred times as much as those in 
Wisconsin and other States, is a complete enigma from the 
standpoint of any of the popular theories of wages, yet they 
are phenomena which a scientific law of wages is bound to 
explain. 

In the light of the theory here presented, however, these facts 
assume an entirely normal role and become perfectly explainable. 
In the first place, the laborers' savings-bank deposits, like the 
accumulations of any other class, are entirely of the nature of a 
surplus,^ and therefore, like rents and profits, are governed by the 
law of surplusage. It will be observed that the surplus, which 
alone makes savings-bank deposits possible, is simply the differ- 
ence between the cost of living of the most expensive families of 
any given class or industry and those who, for whatever reason, 
live upon less. Thus wages may be very high, and still the pos- 
sible surplus be very small, and vice versa. 

For example, if wages in a given class or industry were $3.00 
a day, and the established standard of living in that class was 
substantially uniform, the possibility of saving would be very 
slight, because the cost of living of each family would be practi- 
cally equal to, and hence consume, the entire wages. Under 
those conditions savings would be impossible, except to unmar- 
ried persons or those whose families were smaller than the largest, 
which at best would afford but a small amount of surplus for the 
class in general. Moreover, the possibility of savings from that 
cause would exist in any class, whatever the rate of wages. On 
the other hand, suppose that in a given industry the general rate 
of wages fixed by the dearest laborers is $1.50 a day, but instead 
of the standard of living being uniform throughout the class, it 
greatly varies through the difference in the social habits, as is 
actually the case in this country where American, English, Irish, 
French-Canadian, and Continental laborers are all employed in 

^ Savings-bank deposits in Italy amount to $9.00 per capita of the popula- 
tion. Cf. Political Science Quarterly, vol. iv. , pp. 483, 493. 
^ See diagram No. 2,, p. 206. 



212 AGRICULTURE UNFAVORABLE TO SAVINGS. 

the same industry. Many of these foreign laborers, through their 
simpler habits of life, will be able to live on one half or two thirds 
as much as the American or English laborer, and hence will be 
able to save the difference. With this variation in the cost of 
living to different persons at the same rate of wages, a much 
larger proportion of savings per capita will be possible than in the 
former case, where wages were one hundred per cent, higher. 

That is precisely what exists in this country, and particularly in 
the New England States and manufacturing centres. From this 
point of view there is no difficulty in understanding why savings- 
bank deposits per capita are much smaller in the Western than 
in the Eastern States. In the Western States agriculture is the 
chief occupation. It is well known that agricultural life is more 
nearly uniform than that of any other occupation. Being iso- 
lating in its influence, it affords the minimum incentive for new 
wants and a variety of social demands. Consequently, whatever 
rate of wages prevails, savings will necessarily be very slight in 
agricultural communities, while they might be relatively large in 
manufacturing centres, even with the same rate of wages. Indeed, 
the savings-bank deposits in Italy are derived from wages muchi 
smaller than those in our Western States, where no savings-banks 
exist. 

The same is true of the different States in this country. Wis- 
consin, where the savings are but two cents per capita, is morej 
exclusively agricultural than Minnesota, where they are $2 ; an( 
Ohio is more agricultural than Pennsylvania,^ and Pennsylvania 
than New York. In New England however the reverse is true. 
In Rhode Island, Massachusetts, and Connecticut there is th< 
minimum amount of agriculture and the maximum amount 
manufacture. Consequently they have a greater concentration 
of population and variety of social life among their wage classes 
In addition to this, they have the greatest number of differei 
nationalities engaged in the same occupation, thus greatly ii 
creasing the differences in the standard of living while the sam< 
wage level prevails. 

If we turn to England we find a very different state of affairs 

^ For social purposes, mining and raw-material-producing industries may bl 
regarded as agriculture, because they are similarly isolating and non-socializin| 
occupations. 



WHY FOREIGN LABORERS CAN SAVE. 21 3 

There the population is highly homogeneous ; hence, in each 
class there is a greater uniformity of social habits and cost of 
living, and therefore less surplus from the same aggregate income 
, — that is to say, there are none of those arbitrary differences in 
the style of living in the same class occasioned by an influx of for- 
eigners as in this country. The differences in the standard of 
living there, in the main, are only such as arise from the differ- 
ence in the size of families and the passing from one social grade 
to another. From the causes already explained,^ whenever 
laborers migrate from one industry or social grade to another, 
while they frequently represent the top or most expensive portion 
of the class they leave, they usually represent the bottom, or least 
expensive, of that into which they enter. Just as fast as they are 
transferred from a position where they are the dearest to one 
where they are the cheapest, they are changed from a wage-fixing 
to a surplus-receiving position. The savings-bank deposits will 
naturally therefore, be much smaller per capita in a homogeneous 
country like England than in a heterogeneous country like Amer- 
ica, even though the wages were the same in both countries. 
Savings are not due to the amount of the wages, but to dif- 
ferences in the cost of living in the class where the same rate of 
wages prevails. 

This explains why such a large proportion of the laborers in 
this country who have bank accounts which is so commonly re- 
garded as conclusive evidence of superior character, are foreigners. 
If the possession of a bank account, or the ownership of what is 
so patronizingly styled '' a little home " — often a mere shanty, — 
is evidence of superior character, why did they not have them 
in their own country, where that " superior character " was de- 
veloped ? It may be replied that it is because wages there were 
too low to leave a margin above what would give them a bare 
living. Precisely so ; but why was there no margin in their own 
country ? Why is there no margin for the best class of Chinamen 
in China, of Germans in Germany, Englishmen in England, and 
Americans in America, while there is a margin in almost any 
country in Continental Europe for the Asiatic, in England for the 
Continental laborer, and in the United States for the laborers of 
every other country in the world ? The answer is obvious. There 
^ Section ii., preceding chapter. 



214 WHY HIGHEST PAID LABORERS STRIKE, 

is no margin from which the best class of laborers can save in 
their own country, simply because there the general rate of wages 
is determined by their own standard of living. They can get 
wages which will leave them a margin over the cost of living, only 
by going where the price of labor is determined by a social char- 
acter and standard of living higher than their own, or, if in their 
own country, by' adopting a standard of living lower than the 
highest of the class to which they socially belong. 

The fact that the lower thus always obtain the advantage 
acquired by the higher is the economic incentive for all indus- 
trial mobility. It is only because the laborer can obtain the 
higher wages previously established in the new country or indus- 
try, that he will ever undertake to face the disadvantages of 
emigrating to a foreign land or endure the inconvenience of 
entering into a new occupation. This law also explains why, 
throughout the history of industrial progress, the most intelligent 
and socially advanced laborers always constitute the discon- 
tented element in their class, and are usually the leaders in labor 
organizations, strikes, and other forms of industrial agitation. It 
is because being the most expensive of their class they have no 
margins and therefore experience the greatest pressure from the 
non-satisfaction of new wants and desires. 

The effect of the earnings of women and children upon the 
wages of men is another fact which the prevailing theories of 
wages have entirely failed to explain. Extensive investigations 
have shown that in those industries where women and children 
contribute to the families' maintenance, the wages of the men 
tend to fall directly as the amount contributed by the women and 
children increases/ Tf it is simply a question of supply and 
demand, as is generally assumed, the competition of women and 
children for employment would tend to reduce the wages of all 
laborers ; because as laborers increase in one industry they would 
migrate to others, and thus the effect would be the general reduc- 
tion of the rate of wages. Such, however, is not the case. The 
effect is mainly upon the wages of the man in the class where the 
women who work are a part of the same household. Thus we 
find that in the same social grade and locality, in the trades 
where the man supports the whole family, his wages are fully as 

^ For the facts upon this point see " Wealth and Progress," pp. 167 and 172. 



FATHER'S WAGES AND FAMILY'S INCREASE. 21 5 

high as those of the whole family where the wife and one or two 
children contribute to the family's support. 

A table will elsewhere be found ^ constructed from the indi- 
vidual statements of wages and cost of living of three hundred 
and ninety-seven families employed in ten different industries in 
Massachusetts. These facts show that the total yearly income of 
the family in the highest class was $821.40, and cost of living 
$772.21, and in the lowest the total income was $682.05 and cost 
of living was $650.81. In the highest class where the women 
and children who work were only as one fourth of one to a 
family, the wages of the man were $752.36. In the lowest class 
where the women and children who work were as one and one 
third to a family, the man's wages were only $424.12. In other 
words, in those industries where the women and children con- 
tribute only $69 a year, the wages of the man were only $19 less 
than the total cost of the family's living, whereas in the indus- 
tries where the earnings of the women and children were $257 a 
year, the wages of the man were $226 less than the total cost of 
the family's living. It will thus be seen that while the difference 
between the total income of the family in the highest and lowest 
class was almost exactly the same as that in the total cost of the 
family's living, the difference in the highest and lowest yearly 
wages of the man was greater than that in the cost of living by 
almost exactly the amount of the difference in the earnings of the 
women and children. That is to say, while the total income of 
the family varied with the total cost of the family's living, the 
ratio of the man's wages to the cost of the family's living dimin- 
ished directly as the total earnings of the women and children 
increased.^ Thus whether the income of the family is all de- 
rived from one source or from several sources, its total amount 
tends to equal the total cost of the family's living. 

Therefore, from whatever standpoint we study the move- 
ment .of wage phenomena, we find that the general rate of wages 
in any country, class or industry, constantly tends to equal the 

^ '* Wealth and Progress," 171. 

^ " Thus, it is seen that in neither of the cases where the head of the family 
is assisted by his wife or children, does he earn as much as other laborers. 
Also, that in the case where he is assisted by both wife and children, he earns 
the least." — Report of the Bureau of the Statistics of Labor, Massachusetts, 
1876, p. 71. 



2l6 COST OF LIVING HOW AFFECTED. 

cost of living of the most expensive families furnishing the 
necessary supply of labor. 

The cost of living may be affected in two ways, either by a 
change in the price of the commodities which the laborer con- 
sumes or by a change in the quantities of those commodities 
which enter into his habitual consumption. An increase in the price 
of commodities would be a rise in the money cost of living, but 
not a rise in the standard of living ; hence, while it would increase 
the money wages, it would not increase the amount of wealth the 
laborer receives for a day's labor. It would therefore be a rise 
in nominal wages, but not a rise of real wages.^ An increase in 
the cost of living, arising from an increase in the commodities 
habitually consumed by the laborer, would constitute a rise in the 
standard of living. It would increase the actual amount of wealth 
daily received by the laborer, and hence would be a rise of real 
wages. Thus a rise in the cost of living and nominal wages is of 
no social advantage to the laborer except when accompanied by 
a rise in the standard of living and of real wages.^ 

It is therefore a rise in the actual social standard and not in 
the nominal money cost of living, which is of importance in con- 
sidering the question of wages. Indeed it is in the minimizing of 
the money cost and the maximizing of the social standard of 
living that industrial and social progress really consists. In 
other words, the condition of the laborer improves only as the 
price of commodities falls and the price of labor rises. The 
standard of living in any class or country depends upon the 
social character of the people. Social character is chiefly deter- 
mined by the number and variety of established social wants, 
and the consequent simplicity or complexity of social relations.^ 
It may therefore be said that wages finally depend upon the 
social character of the laboring classes, the restriction or devel- 
opment of which is mainly determined by the extent and perma- 
nence of their social opportunities. When we learn to regard 

^ " Wealth and Progress," pp. 96-98. 

'^This law is just as true in "piece-work" as it is in "day-work." See 
chapter on " Piece-Work," " Wealth and Progress," p. 179. 

^ For an extended discussion of the relation of social wants and character to 
the standard of living, see "Wealth and Progress," Part II., chap, ix., pp. 
187-203. 



REMEDY FOR LOW WAGES. 21/ 

wages simply as the price of labor which is governed by the 
laborer's standard of living, we shall see that the laborer is not poor 
because the capitalist is rich, but that wages are low because 
the laborer is socially cheap. The true remedy for low wages 
therefore is not to be sought in profit-sharing, nationalization of 
land and productive instruments, or in any other schemes for 
restricting the economic opportunities of the capitalist, but solely in 
conditions for extending the social opportunities of the laborer. 



I 



CHAPTER IV. 
RENT, ITS LAW AND CAUSE. 

Section I. — The Definition of Rent. 

The definition of rent generally accepted by economists is that 
given by Ricardo/ namely, '^ that rent is that portion of the prod- 
uce of the earth which is paid to the landlord for the use of the 
original and indestructible powers of the soil." ^ 

It is manifest that if rent is limited to what is paid for " the 
powers of the soil," or 'C^q fertility of the land, then what is paid 
for land used for building, manufacturing, and commercial pur- 
poses is not rent at all, since the price paid for such land is 
entirely independent of the quality of its soil. Moreover, the 
rent paid for some of the most sterile land for building purposes 
is greater than that paid for the most fertile land in the world. 
A definition of rent that does not apply to land which pays the 
highest rent of all, and w^hich is increasing as civilization 
advances, musi- surely be regarded as defective. Nor is this 
definition materially improved by Mr. Walker's qualification that 
the expression *' original and indestructible powers of the soil " 
includes "not only arable land, but pasture and timber land, 
mineral deposits, water privileges, and building sites." ^ While 
in this case it includes all that is paid for the "original and 
indestructible powers " of any kind of land, it fails as a defini- 
tion of rent, because as we shall see rent is never paid for " the 
original and indestructible powers " of any land. 

It is true that some agricultural land has a high degree of 
original fertility, but there is no land whose fertility is inde- 

^ " Political Economy and Taxation," pp. 34-36. 

'^Walker's "Political Economy," p. 193. Also, McCulloch's "Political 
Economy," p. 142. 

^ "Political Economy," p. 193. 

218 



I 



RENT IS ECONOMIC SURPLUS, 2lg 

structible. Every intelligent farmer knows that continuous 
cultivation without fertilization will impoverish or destroy the 
fertility of the most productive land ever known. The fertility 
of land is not only always destructible, as in the case of mines, 
but it is frequently not original ; indeed much of the most 
productive agricultural land in the world to-day owes its fertility 
not to its " original powers," but almost entirely to improvements 
created by the application of labor and capital. And the greater 
part of the land whose fertility is thus created commands a higher 
rent than much of that which possesses the greatest amount of 
"original fertility." ^ 

In the case of land for building purposes alone, the so-called 
" powers of the soil," or qualities of the land for which rent is 
paid, are neither original nor indestructible. Indeed it does 
not depend upon any quality whatever peculiar to land. On 
the contrary, rent is entirely due to the presence of a highly 
civilized industrial community. If New York City were removed 
a hundred miles from Manhattan Island, the rent of the greater 
part of the land, some of which is the highest paid for any land 
in the world, would entirely disappear. Clearly therefore, if 
rent is limited to that " which is paid to the landlord for the use 
of. the original and indestructible powers of the soil," almost 
none of the income from land is rent, since a very small portion 
of such income is paid for its " original " and none at all for its 
"indestructible powers." 

The chief difficulty with this definition is that it fails to dis- 
tinguish between price and surplus. Rent is not the price 
of land ; it is only the economic surplus arising from its use. In 
order to avoid confusion I define rent as ^Ae net surplus resulting 
from the productive use of land under all economic conditions for 
any purpose whatsoever. To explain how this surplus arises is to 
furnish the law of rent. 

Section \\.~The Lazv of Rent. 

Rent being an economic surplus, in seeking the law of rent we 
are simply seeking the law of surplus in relation to the produc- 

^ Witness the high rents paid for the land used for market-gardening and the 
highly cultivated farms in such countries as Belgium and England, whose fer- 
tility is largely artificial, and the low rent paid for the most fertile land in our 
Western States, whose productiveness is largely original. 



220 ECONOMIC PRODUCTION OF LAND. 

tive use of land. And as surplus is included in and received 
with the price, it being the difference between price and cost, it 
follows that the law of surplus is a necessary corollary of the law 
of price. In order, therefore, to ascertain the law of rent, we 
have only to apply to land the general law of prices presented in 
a previous chapter ^ — namely, that in a given market prices tend 
towards uniformity on the basis of the cost of producing the 
most expensive portion. It is objected by some that since land 
is the " free bounty of nature " it can have no cost of production. 
This is a mistake. It should be remembered that economic pro- 
duction does not mean physical creation but only economic and 
social adaptation. This may involve a great deal of physical 
modification both in form and location, or it may involve little 
or none of either. 

The production of broadcloth or a gold watch involves a great 
deal of physical change in the wool and in the gold, steel, and 
other metals of which the cloth and watch are made, whereas the 
production of nuts and bananas involves very little. The more 
nearly complete is an object furnished by nature the less will be 
the cost involved in appropriating it to human uses, and vice 
versa. The cost of producing a power-loom includes all the 
expenditure necessary to complete it as an instrument for weav- 
ing. This of course does not mean the creation of the iron or 
wood of which the loom is made, but only their adaptation to 
productive purposes. It is in this sense that we speak of the 
cost of producing land, the term production having not a 
physical but only an economic signification. For economic 
purposes therefore, the cost of producing land, like that of any 
other productive instrument, includes all the expenditure neces- 
sary to utilize it as a means of production. 

The law of price in relation to land, therefore, may be stated 
thus : That under conditions of economic freedom, the price of 
land in any given community tends to equal the cost of its produc- 
tion — />., the cost of actualizing its economic and social utility. 
Hence when the cost per unit of using all the land is the same, 
the price and the cost of production (economic use) will be identi- 
cal, and no surplus or rent will remain. And whenever the cost 
per unit of using different portions of land varies, the price per 
^ Part II., chapter iii. 



THE LAW OF RENT. 221 

unit will tend to a uniformity on the basis of the cost of actual- 
izing the utility of the most expensive portion of the land used 
for that purpose in that community. Thus while the price per 
unit of the whole land in that community tends to a uniformity, 
that of the portion whose utility costs the most to actualize it 
will consist entirely of cost, and that of the others will consist of 
cost and rent (surplus), the rent increasing as the cost of utiliza- 
tion diminishes below that of the most expensive portion used. 

Having found the law of prices in relation to land, we have as 
a necessary corollary the law of surplus — i.e.^ the law of rent. It 
may be stated as follows : That under conditions of economic 
freedom^ the rent of land used for any purpose tends to equal the 
difference between its productive utility and that of the poorest 
land used for the same purpose in that community^ or which con- 
tributes to the necessary supply of the same market. 

It will be observed that the conclusion here reached is sub- 
stantially the same as that of Ricardo, stripped of many mislead- 
ing assumptions by which the Ricardian theory has ever been 
accompanied. 

In the first place, by treating rent as the net surplus resulting 
from the productive use of land, we entirely avoid the error in- 
volved in the Ricardian definition of rent as the price paid for 
" the original and indestructible powers of the soil." And by re- 
garding land simply as a productive instrument, thereby putting 
it in the same economic category with other forms of capital, we 
remove all grounds for the perplexing controversy as to whether 
the income from improvements in land is properly rent or profits. 
Since rent and profits are both economic surpluses, whether or 
not they are designated by the same term is a matter of entire 
indifference. We also avoid the confusing consequences of that 
erroneous assumption of Ricardo, that land is always utilized in 
the order of its fertility, the best being taken first and the 
poorest last, an assumption which Carey devoted tedious space 
to exposing, and which Walker and other Ricardians are still 
laboring to defend. 

From the point of view here presented, it is absolutely of no 
importance whether the land is cultivated in the order claimed 
by Ricardo or that claimed by Carey, the law will operate the 
same in either case. If the inferior land were used before the 



222 RENT GOVERNED BY LAW OF SURPLUS, 

superior, as is frequently the case, the only difference would be 
this : instead of the land employed last being used at cost, and 
that employed first yielding rent, as Ricardo assumed, the order 
would be reversed and the land employed first would be used at 
cost, and that employed last would yield a rent. Neither the 
amount of land used nor the amount of rent paid would be 
affected by that change. The difference in the productive utility 
of the land will be rent just the same, whether the inferior or su- 
perior is brought first into use. It is not the historical order of 
their use, but the difference in the degree of their productive 
utility, that determines the amount of the rent. The difference 
in the fertility of two pieces of land yielding twenty and twenty- 
five bushels of wheat respectively will obviously be just as great 
whichever is brought into use first. 

If the subject had been treated from the point of view here 
presented, these errors would have been avoided. It would then 
have been obvious that the order of use of superior and inferior 
land has no necessary relation whatever to the price-fixing or sur- 
plus-producing influence of either labor, land, or machinery. For 
in all cases and under all conditions where economic freedom 
prevails, the price is determined by the cost of using the least 
effective, and therefore the most expensive increment, and 
whether that be first or last makes absolutely no difference. By 
this treatment of the subject, we not only avoid the error and re- 
tain what is true in the popular theory, but we have a consistent 
classification of economic phenomena, by which the price of land 
commodities and labor is governed by the law of price, and on 
the other hand, the rent of land, the profit of capital, and the sav- 
ings of labor are governed by the law of surplus. 

Section. III. — The Cause of Rent, 

No theory can be regarded as furnishing an adequate explana- 
tion of rent phenomena which does not explain the cause of rent. 
When we know how rent comes into existence, and by what 
social force it becomes economically possible, we shall be able to 
determine whether it arises from an economic necessity and is a 
social advantage, or whether it is due to economic despotism and 
is a social burden, — as is commonly believed. Upon this point 
the popular doctrine is perhaps least of all satisfactory. Francis 



1 



WALKER'S EXPLANATION OF RENT. 223 

Walker, who has probably taken more pains than any other 
writer to make good the deficiencies in the Ricardian theory of 
rent, endeavors to show that the difference in the productiveness 
of land is not only the measure and regulator of rent, but that it is 
also the cause or source of rent. He has endeavored to illus- 
trate exactly how, under the influence of self-interest, rent arises/ 
Like Ricardo, he begins by assuming the existence of a new 
country with four grades of land, which will yield, with the same 
expenditure of labor and capital, 24, 22, 20, and 18 bushels of 
wheat per acre respectively. He also, like Ricardo, assumes that 
the best land, or 24-bushel tract, will be cultivated first, and the 
others in the order of their fertility, and says : " Cultivation then 
descending to the 22-bushel tract, rent emerges. Under what im- 
pulse ? Why, by the simple operation of the principle of self- 
interest ; inasmuch as some of the would-be cultivators must go 
upon the 22-bushel tract, every person now in the occupation of 
a lot on the 24-bushel tract may just as well — may he not ? — pay 
something for the privilege of remaining where he is, as take up 
a lot of the new land for nothing ? If not, why not ? How much 
shall he pay ? Why, clearly, 2 bushels per acre, the difference 
between the yield of the two tracts under the same application of 
labor and capital." ^ This continues until the whole four tracts are 
brought under cultivation, rent rising 2 bushels per acre on 
each tract under cultivation, when the next is brought into use, 
and the rent on the different tracts is 2, 4, and 6 bushels per 
acre respectively. Then further '' to illustrate the operation of 
this cause " he assumes the existence of a distant tract of land 
that will yield with the same labor and capital 30 bushels per 
acre. But through its greater distance from the market 12 
bushels are consumed in transportation, reducing the amount de- 
livered to the market to 18 bushels, or the same as the product 
of the poorest home tract. He then, by a series of improvements 
in the methods of transportation, reduces the cost of bringing 
the crop of the distant tract to market from 12 to 9 bushels per 
acre, and says : " The net produce of the distant tract (30—9) has 
now risen to 21 bushels. The 20-bushel tract must be abandoned." 
. . . The highest grade of land now yields a rent of but 3 
bushels an acre (24 — 21), the second of but i bushel. The aggre- 
' *' Land and its Rent," pp. 10, 57. ' Ibid., p. 18. 



224 FERTILITY NOT CAUSE OF RENT. 

gate amount received by the owners of land in rents sinks from 
9 to 4." ' 

It will be observed that at the commencement of Mr. Walker's 
community we found the best land producing 24 bushels per acre 
and paying no rent ; then the same land, without any increas( 
in its productiveness, pays a rent first of 2 bushels, then of 
bushels, and finally of 6 bushels an acre. And then after tl 
discovery of the 30-bushel tract, without any diminution in it| 
productiveness, the rent of the same tract falls from 6 to 
bushels per acre. That of the 22-bushel tract falls to i bushel^ 
and that of the 20-bushel tract disappears altogether. 

The question here is " under what impulse " does the rent o| 
this land rise and fall without any change in its productiveness; 
What new force came into operation to make the tract of lam 
which formerly could be had for nothing, yield a rent of 
bushels and subsequently fall to 3 bushels per acre ? "Why,' 
replies Mr. Walker, " by the simple operation of the principle oj 
self-interest." By what course of reasoning can it be shown thai 
the principle of self-interest in the land owner will always prevai| 
against the self-interest of the tenant ? 

Again, if rent is caused by the fertility of the land or the self|| 
interest of the land owner, or both, why did it not emerge whei 
cultivation first began on the 24-bushel tract ? This was impos] 
sible, Mr. Walker would reply, because it was not until " cultiva| 
tion descended to the 22-bushel tract " that "rent emerges." 
rent was impossible on the 24-bushel tract until the 2 2-bush( 
tract was cultivated, whatever power forced the 22-bushel trac| 
into use, or made its cultivation possible, is manifestly the re£ 
cause of rent on the 24-bushel tract. This could not possibly b< 
the fertility of the land or the principle of self-interest in th( 
landowner, as these were just the same before as after rent wj 
paid. 

Nor does Mr. Walker's distant-tract illustration throw any re£ 
light upon this question. It is true that rent on the home tracts 
falls when the distant tract is cultivated, but from what cause 
Mr. Walker replies, because " the net produce of the distant traci 
has now risen to 21 bushels." Nothing of the kind. So far a^ 
Mr. Walker, has shown, no change whatever has taken place in th< 
^ " Land and its Rent," p. 25. 



ORIGIN OF RENT SOCIAL. 22 5 

productiveness of the land. When we first saw the distant tract 
it produced 30 bushels per acre ; it does the same now. The 
only change that has occurred is a reduction of 3 bushels per 
acre in the cost of transporting the crop. Manifestly that is not 
due to any quality or condition of the land nor to the degree of 
self-interest in the landowner. These are entirely unchanged. 
It may with truth be said that cheapening transportation reduces 
the cost of producing the wheat, but it in no way changes the in- 
fluences of this land upon the cost of the wheat. The cost of the 
wheat has been reduced by the use of capital, but it is by a class 
of capital quite distinct from land. 

Mr. Walker has shown that rent began on the 24-bushel tract 
when " cultivation descended to the 22-bushel tract," and also 
that rent on all the home tracts fell when the cost of transporting 
the crop of the distant tract was reduced. But this does not explain 
the cause which brought all this about. To say that rent rises 
when inferior lands are cultivated and falls when transportation 
is cheapened, is only like saying the train moves when the engine 
starts. But what starts the engine remains to be ascertained 
before the cause of this movement is explained. In stopping 
at this point Mr. Walker repeats one of the chief mistakes of 
orthodox economists — namely, the failure to connect economic 
phenomena with the social influences from which they arise. ^ 

What is the cause of rent is therefore still the question. Nor 
will the answer be very difficult to find if we pursue the inquiry 
along the lines already travelled and bear in mind the conclusions 
reached in the preceding section ; namely, that land like all other 
forms of capital is simply a productive instrument, and that rent 
is a net surplus resulting from its economic use. Since an 
economic surplus is the difference between the price of products 
and the cost of their production, rent can only be obtained from 
the price of the commodities in the production of which it is used 
as an instrument. Clearly therefore, it is to the influences which 
govern the price of the products that we must look for the cause 
of rent. Let us return to Mr. Walker's community and see if we 
can ascertain the cause that made the existence of rent possible, 
which he failed to explain. 

^ This limitation in regard to the use of improved machinery has already been 
pointed out. See pp. 143-149. 
15 



226 RELATION BETWEEN PRICES AND RENT. 

In the first place why did not the 24-bushel tract pay a rent 
when first cultivated ? It was not because of its inferiority, since 
it was the best land in the community ; nor was it from any lack 
of self-interest in the landowner, for there never was a time when 
he would not exact rent if he could. The reason no rent could 
be obtained for it was that, there being only one grade of land in 
use, the cost of production, so far as it affected land, was uni- 
form. Hence according to the law of price already stated, the 
value of every part of the product was only equal to the cost of 
its production. Since the price of the wheat equalled the cost of 
production on the 24-bushel tract, in order to cultivate the 22- 
bushel tract without loss one of two things must necessarily 
occur — either the price of the product must rise, or the cost of 
production must be reduced. 

We will consider first, how a rise in the price of the produce 
would affect the situation, since the expounders of the popular 
doctrine always assume that this takes place. It is insisted upon 
by these writers that rent does not increase the price of commod- 
ities to the consumer, because the rent is the effect of the price 
and not the price the effect of the rent.^ But if it is true that 
rent can only be paid or, if already paid, can only be increased 
by a rise in the price of the produce, and that the rise in price is 

^ " It is because its (the produce) price is high or low, a great deal more, or 
very little more, or no more than what is sufficient to pay these wages and 
profits, that it affords a high rent, a low rent, or no rent at all." Adam Smith, 
" Wealth of Nations," book i., chapter i., p. 115. " Corn is not high because 
a rent is paid, but a rent is paid because corn is high." Ricardo, "Political 
Economy and Taxation," p. 39. See also ibid., pp. 40, 61, 62. " The in- 
habitants must consent to pay such an additional price for raw produce as will 
enable the second quality of land to be cultivated. No advance short of this 
will procure them another bushel of corn. ... If they choose to pay a price 
sufficient to cover the expense of cultivating the land of the second quality they 
will obtain additional supplies, if they do not, they must want them." McCul- 
loch, "Principles Political Economy," p. 142. "Rent is the effect of high 
price. ... It is not from the produce, but from the price at which the prod- 
uce is Sold, that rent is derived." Buchannan, note, p. 40, Ricardo's works. 
" It is not the diversity of soils nor the law of diminishing returns, that causes 
rents, since these continue as before when rent ceases to be paid, but it is the 
price of produce under demand and supply that causes rent." Perry, " Political 
Economy," p. 292. " The rent of land is determined by the value of its prod- 
uce." Wade, " Political Economy," p. loi. 



ECONOMIC BASIS OF RENT. 22/ 

paid to the landowner in rent, it is little more than a quibble 
to say that the payment of rent does not increase the price of 
commodities. Whether rent is the cause or effect of rise in 
price, is of very little importance to the community if every rise 
in rent is accompanied by a rise in the price. If for example, it 
cost a dollar a bushel to raise wheat on the 24-bushel tract, 
it would, under the same conditions, cost a dollar and ten cents 
a bushel to produce it on the 2 2 -bushel tract. If the wheat could 
all be sold at that price, it would of course yield a surplus of ten 
cents a bushel, or two bushels an acre on the 24 bushel tract. 
Were this the only effect it would be a simple matter, but there 
are other influences to be reckoned with. A rise in prices would 
be a practical fall in wages ; hence every extension of cultivation 
to poorer soils which increased the rent of the landowner would 
increase the poverty of the laborer. Were such the case, the con- 
dition of the masses would indeed be hopeless. Henry George's 
pessimistic declaration that " rent swallows up the whole gain 
and pauperism accompanies progress " would be literally true. 
Fortunately for civilization however, the testimony of history is 
all against such a notion. Rents have never increased so much 
as during the present century, and the general fall in prices was 
never so great as during the same period. 

Nor is it possible that it should be otherwise, except in a state 
of political despotism or industrial piracy. Under conditions 
of economic freedom, it is as impossible for rent to rise through 
increasing prices and reducing real wages, as it is for civilization 
to advance by increasing poverty. Economic law presents an ab- 
solute barrier to any such parasitic movement by which a surplus- 
receiving class can be permanently enriched by the impoverish- 
ment of the community. For the same reason that the landowner 
cannot obtain rent except when the land yields a margin above 
the cost of production, the cultivator cannot sell his produce at 
a price higher than the consumers can afford to pay. Clearly 
therefore, the product cannot be sold at a higher price unless the 
purchasing power of the masses is commensurately increased. A 
general increase of prices without a rise of wages would not only 
defeat itself by destroying the market for the products, but it 
would necessarily lower the standard of living and actually put 
back civilization. If a rise of prices is accompanied by a com- 



228 EFFECT OF POPULATION ON PRICES. . 

mensurate rise of wages, as 'it admittedly must be/ it would in- 
crease the cost of cultivating the land as much as it increased the 
price of the crop, making the cultivation of the 22-bushel tract as 
impracticable as ever. 

Nor would a mere increase of population change the result. 
If population should increase and the consumption or effectual 
demand per capita of the community (real wages) remain sta- 
tionary, prices could not advance except with the same conse- 
quences as before. The mere fact presented by Mr. Walker, that 
the 24-bushel tract is " inadequate to the needs of subsistence," 
is not sufficient to insure the cultivation of the inferior tract. 
The community may lack subsistence, people may die of starva- 
tion, as they often have ; but nobody will cultivate the 22-bushel 
tract unless its products can be sold at a price at least equal to 
the cost. 

It may be said that if the population increases, the aggregate 
income and purchasing power of the community would be in- 
creased, though wages were stationary. This is true, but since in 
that case the number among whom the purchasing power is 
divided would be increased in the same ratio, no one would be 
richer than before, and consequently, the purchasing power of 
the individual members of the community would not be increased. 
A mere increase of the population, other things remaining the 
same, would enable a larger amount to be consumed at the same 
price, but it would not increase the capacity of anybody to pay a 
higher price. 

If an article of food, clothing, or the like, cannot be produced 
for less than 25 cents, and at the prevailing rate of wages the 
laborer can only pay 20 cents, it is clearly out of his power to 

^ " As the wages of labor are everywhere regulated partly by the demand for 
it, and partly by the average price of the necessary articles of subsistence, what- 
ever raises this average price must necessarily raise those wages." Adam Smith, 
"Wealth of Nations," book v., chapter ii., p. 691. Ibid.^ p. 693. " With a rise 
in the price of food and necessaries the natural price of labor will rise." Ricar- 
do, " Political Economy and Taxation," p. 50. " There can be no permanent 
fall of wages, but in consequence of a fall (in the price) of the necessaries on 
which wages are expended," Ibid., p. 75. " If they (the laborers) had to pay 
8s. per quarter in addition for wheat . . . wages would inevitably and 
necessarily rise." Ibid., p. 93. Cf. Mill's " Political Economy," vol. ii., pp. 
423, 424, 425. 



EFFECT OF IMPROVED METHODS. 229 

consume it. Nor would any conceivable addition to the number 
of 20-cent purchasers add one whit to their capacity for pur- 
chasing 25-cent articles. The consumption and production 
of 25-cent articles can never be promoted by increasing the 
number of 20-cent consumers. Nothing can make the produc- 
tion of 25-cent articles possible but the creation of 25-cent 
purchasers. Manifestly, therefore, other things remaining the 
same, it is impossible in any general sense to extend cultiva- 
tion to inferior land by merely increasing the price of com- 
modities. 

Since the use of the 22-bushel tract cannot be made feasible 
by advancing prices, the only means by which it can be made 
feasible is by reducing the cost of production. There are 
only two ways by which the cost of production can be lessened, 
either by a' reduction of wages or the use of improved methods.^ 
The former is impossible for the same reason that prices could 
not be advanced. The latter, therefore, is the only alternative 
consistent with a progressive state of society. What form im- 
proved methods will take depends upon the state of civilization. 
In a very early stage of society it might consist of substituting 
a spade for a crooked stick, or at a later period a plough for a 
spade, or mowing and threshing machines for the scythe and 
flail. At whatever period it occurs or whatever form it takes, 
since it cannot cheapen^ it must save labor. This does not mean 
that it must merely discharge labor for, as already explained, 
labor is only economically saved when it is re-employed. Thus 
in the case of land, as in every other phase of economic move- 
ment, the successful use of improved methods of production 
must necessarily be accompanied by new employment-creating 
conditions. Nothing can create new employments except new 
demands, or an increase in the consumption of wealth per capita 
of the population, which of course means an increase in real 
wages. When by this means inferior land can be cultivated 

^ Improved methods include every thing that makes the same land yield more 
or yield the same amount at a less cost. This may result from superior skill, 
better division of labor, more capital in the form of fertilization, better drainage, 
the substitution of animals for men, or steam for animals, improved implements 
for either, or any other labor-saving or cost-reducing appliances. 



230 RENT FOLLOWS MOVEMENT OF WAGES, 

without loss, the superior land can be cultivated at a profit ; that 
is to say, when the price of 22 bushels of wheat will defray 
the cost of cultivating an acre of the 22-bushel tract, the 
24-bushel tract will yield a surplus or rent equal to ten cents 
a bushel or two bushels per acre, without either increasing 
the price of the product or reducing wages. In the last analysis 
therefore, the determining cause of the use of inferior land and 
the payment of rent on the superior land is the increased con- 
sumption of wealth by the masses. 

If we examine the cultivation of Mr. Walker's 30-bushel tract 
we shall find that its use finally depends upon the same cause. 
He explains how what he calls its " net productiveness " rose 
from 18 to 22 bushels per acre, by improved methods of trans- 
portation. The moment we ask what made improved methods 
of transportation possible, the answer is simple and obvious. The 
railroads and steamships which enabled the lands of Dakota to 
contribute to the wheat supply of Liverpool and London were 
clearly due to the increased consumption of wealth per capita of 
the population, which made the construction and use of railroads 
economically feasible. Nor could this result from a mere in- 
creased consumption of wheat, but it required a vast increase in 
the demand for numerous manufactured articles whose produc- 
tion and consumption involved a large amount of travel and 
transportation. An increased demand for commodities and a 
higher social standard of living, which makes steamships and 
railroads possible, are simply the economic embodiments of 
higher wages. Thus whether land is cultivated in the order of 
the best first, and the poorest last, as represented by Mr. Walker's 
four tracts, or the reverse, as claimed by Carey, the result is the 
same, namely, that rent or a surplus from the use of land, like 
that of all other productive instruments, finally depends upon the 
increasing consumption of wealth per capita of the community. 
In other words, the cause from which economic rent arises is the 
advancing standard of living and the rise of real wages among 
the masses. 

Section IV. — Is Rent a Social Tax ? 

Were it not commonly believed that rent is an unjust burden 
upon the community, the abolition of which warrants the subver- 



TRUE NATURE OE RENT, 23 1 

sion of existing institutions, the consideration of this question 
might properly seem superfluous. The claim that rent is a tax 
by which the land-owning class are enabled to live at the expense 
of the industrious community, legitimately arises from the Ricar- 
dian postulate that " rent is that portion of the produce of the 
earth which is paid to the landowner for the use of the original 
and indestructible powers of the soil." No more fallacious notion 
was ever taught than that rent, or any other economic surplus, is 
a price paid for the free contribution of nature. There is no 
economic law by which a charge can ever be exacted for the use 
of gratuitous natural forces.^ This view is further supported by 
the no less popular doctrine that, in the economic order of dis- 
tribution, rent is paid before wages, and that consequently the 
laborer can only receive as his share of the product what is left 
after rent and profits are taken out.^ 

The utter untenableness of both these positions having been 
already pointed out, the answer to the question '* is rent a social 
tax ? " need not detain us long. 

Like all other forms of surplus, rent arises from the sure 
operation of the law of economic prices ; being simply the 
difference between the maximum and the minimum cost of pro- 
duction per unit of product. 

If this difference in the cost is due to the difference in the 
methods, such as a better division of labor, higher skill, more 
capital, better machinery, etc., the surplus created will go to the 
entrepreneur and in common phrase will be called profits. And 
if the difference in the cost of production is due to the different 
degrees of productive utility of the land, the surplus created will 
go to the landowner as rent. If the poorest instruments and the 
poorest lands are used together no surplus can arise for either the 
landowner or entrepreneur. But if superior instruments are used 
with inferior land, the entrepreneur may have a surplus without 
the landowner having rent, and conversely, if the superior land is 
operated with inferior instruments, the landowner may obtain a 
rent, while the entrepreneur can have no profit. Thus there can 

^ Part II., chap, iv., pp. 21, 22. 

^ Jevons' "Theory of Political Economy," p. 292. Walker's "Political 
Economy," pp. 248, 249. Sidgwick's "Principles of Political Economy," p. 
322. Henry George's "Progress and Poverty," pp. 162, 163. 



232 MACHINERY AND LAND. 



neither be rents nor profits unless the joint use of the land an^ 
implements produce at less than maximum cost, and the surplu 
if any, will be divided between the owners of these two classes of 
productive instruments or all accrue to either one, just in pro- 
portion as it is due to the superiority of the land or of the 
instruments. 

There is this difference, however, between land and other pro- 
ductive instruments : the different qualities of machinery always 
come into use in the order of the poorest first and the best last, 
whereas in the case of land, sometimes the best comes into use 
first. The reason for this is that, machinery being a human in- 
vention, each new device is the result of an effort to improve 
upon the last ; its superiority over existing methods being the 
only reason for using it, and the only motive for making it. On 
the other hand, land being a natural product whose quantity and 
locality are unchangeable, the use of the poorer or less productive 
land can only be made feasible by the employment of superior 
appliances. Thus, while it is always the best land and the best 
machinery which yields a surplus, in the case of land when the 
best is used first (as in the Ricardo-Walker assumption) it does not 
yield a surplus until the second grade comes into use, whereas in 
the case of machinery the surplus always commences on the best 
which is last when its own use becomes possible. But whether 
the use of land descends from the superior to the inferior through 
the use of capital in better drainage, improved tools, machinery, 
etc., or whether it ascends from the inferior to the superior 
through improved methods of transportation (as in the case of 
Walker's distant tract), makes no difference either in the amount 
of rent paid or the effect of rent upon wages and the welfare of 
the community. 

In whatever order improvements are applied to the use of land 
and a surplus is created, the rent will always depend upon the 
difference between the cost per unit of the product due to using 
the best land and that of using the poorest land employed for 
that purpose within the same competing group or community. 
Since rent can only be obtained from a surplus that remains after 
all costs of production are paid, and since wages are governed by 
social causes independent of the quality of land or machinery, 
and prices are determined by the cost of producing the most ex- 



lS 



RELATION OF RENT TO WAGES. 



233 



pensive portion of the supply which always includes wages, it 
follows that rent can only be obtained when a surplus remains 
after wages and prices have been determined. The economic re- 
lation of rent to wages and prices is illustrated in the following 
diagram, which represents Mr. Walker's four tracts producing 24, 
22, 20, and 18 bushels per acre respectively, the assumption being 
that with wages at $1.50 per day the cost of production on the 18- 
bushel tract is a dollar a bushel. 









No 


. 3. 




Rent 

PER 

Acre. 


Surplus 

PER 

Bushel. 


Price • 

PER 

Bushel. 


Wages 

PER 

Day. 


Cost per Bushel. 


Bushels 
PER Acre. 


$6.00 
$4.00 
$2.00 
|o.oo 


25 c. 
18 c. 
10 c. 
00 c. 


$1.00 
$1.00 
$1.00 
$1.00 


$1.50 
$1.50 
I1.50 
$1.50 


Minimum cost, 75 c. 
82 

Maximum cost 


24 
c. 22 
. 90 c. 20 

$1^ 18 



From the above, four things will be seen : (i) That A, who 
uses the poorest land and pays no rent, sells at cost and has no 
surplus. (2) That, the price of wheat being the same with all, B, 
C, and D, whose land yields 2, 4, and 6 bushels per acre respec- 
tively more than that of A, have a surplus of $2, $4, and $6 per 
acre. (3) That the surplus in the rent column on the left only 
begins and increases as the cost line per bushel on the right re- 
cedes from (falls below) that of A. (4) That the increase 
of the amount in the rent column in no way affects the price or 
wages column ; D, whose rent is the highest, sells at the same 
price and pays the same wages ^ as A, who pays no rent at all.^ 
Since the consumer's price and the laborer's wages are both de- 
termined at the point where no rent is paid, it is manifest that 

^ As a matter of fact the large concerns in both manufacture and farming 
represented by D, where the largest capital and best methods are used, are con- 
stantly tending to pay higher wages and sell at lower prices than small farmers 
or manufacturers represented by A. 

^ If we assumed the four tracts of land to be of uniform quality and suppose 
the difference in the product to arise from superior skill, larger capital, better 
implements, etc. , the result would be exactly the same, only the surplus column 
instead of representing rent would represent profits as shown in diagram 
No. I, p. 204. 



234 HIGH WAGES CAUSE HIGH RENT, 

the surplus paid to the landlord is in no sense a burden upon 
either the consumer or the laborer ; that is to say, prices are not 
higher nor wages lower because rent is paid. Indeed, if rent were 
obtained at the expense of the consumer or the laborer, we should 
find that prices rise and wages fall as rents increase, whereas the 
reverse is universally true. 

The highest rents are paid in the most civilized countries, and 
in such countries rent is higher in the city than in the small town 
or rural district. And it is precisely in these countries and cities 
where rents are the largest, that wages are the highest, and gen- 
eral prices are the lowest.^ Consequently we find the migratory 
movement of the laborers (which is always towards higher wages 
and better living) is constantly from low-rent countries to high- 
rent countries, from the rural districts where the rent is low to 
the cities where rent is high. This also explains why commodi- 
ties can often be obtained more cheaply in large cities than in 
small towns, as shown by the fact that thousands of people travel 
from fifty to a hundred miles to a city to make their purchases. 
This does not mean that things are cheaper or wages higher 
because a rent is paid, but that things are cheaper and rents are 
larger because wages are higher there than elsewhere. 

Nor is there any means, except charity or theft, by which the 
amount in the rent column can possibly be made to find its way 
to the laborer or consumer. The only economic way it can be 
given to the consumer is to compel B, C, and D to reduce the 
price of their product the full amount of their surplus — lo, i8, 
and 25 cents per bushel respectively. Should D sell his wheat at 
75 cents a bushel, nobody would continue to buy from C, B, and 
A, unless they sold theirs at the same price, which they could not 
do, since it cost them more than that amount. If the product of 
C is needed, 82 cents a bushel is the lowest price at which it can 
be supplied ; and if that of B is required, the price cannot fall 
below 90 cents a bushel ; and so long as that of A is needed, the 
price must be a dollar a bushel, because less than that will not 
repay the cost of producing it. No matter how the price is fixed 
or who fixes it, it cannot possibly be less than equal to the cost 
of producing the most expensive portion. 

^ That is to say, the price of a day's labor will purchase the largest amount 
wealth. 



unt o^B 

J 



EFFECT OF ABOLISHING RENT. 235 

If the surplus is to be given to the laborer in any other way 
than by reducing the price, it must go in the form of in- 
creased wages. In order to do this wages must rise directly as 
the surplus increases. The same difficulty arises here as in the 
case of prices ; indeed, wages are simply the price of labor. If 
D pays higher wages, then the laborers of C, B, and A will refuse 
to work unless they can have the same. If A is compelled to 
raise wages equal to 25 cents a bushel, the co§t and hence the 
minimum price of his product will necessarily rise to $1.25 a 
bushel, which will then be the price of the whole product. Thus, 
all that D, C, and B are by this means forced to give to the 
laborer in higher wages, A is forced to demand back again from 
the consumer in higher prices, and the difference or surplus will 
: be exactly as before, the only change being that both wages and 
\ prices have risen 25 cents. In short, there are no economic 
means by which A can obtain an equivalent of the cost of his 
t product which will not give B, C, and D a surplus ; and con- 
I versely, there are no means by which D can sell at cost which 
' will not bankrupt C, B, and A. 

There are two conditions which, under economic freedom, all 

I competing producers must fulfil or leave the business : other 

I things being the same, they must pay the same wages and sell 

I their products at the same price as their competitors in the same 

market. For the same reason that D's price cannot be reduced 

without lowering that of C, B, and A, the wages paid by A cannot 

be reduced without lowering those paid by all the others, since 

whatever will enable A to either raise the price or reduce wages 

will enable B, C, and D to do the same. Manifestly therefore, 

i if the landowner were prohibited from taking the surplus of B, 

• C, and D in the form of rent, it would simply remain in the hands 

of the farmer or entrepreneur as profits. Since the surplus is not 

ij increased by virtue of its being divided between the landowner 

\ and entrepreneur, it could not be diminished by giving it all to 

either one of them. In other words, as the surplus arising from 

the difference in the cost of producing with the poorest and the 

best land would be the same whether rent is paid or not, the 

. abolition of rent would simply be an increase of profits. Rent, 

in short, is entirely a question between the landowner and the 

entrepreneur and does not enter into the problem either of prices 



236 RENT QUESTION SUMMARIZED. 

or of wages. It being impossible for the surplus of B, C, and D 
to go to the consumer either in higher wages or lower prices, 
whether it shall all remain in the hands of the entrepreneur or be 
shared between him and the landowner is of no economic or 
social importance to the laborer or to the community. 

The social welfare of the people can advance only as prices 
fall and wages rise, results which cannot be promoted by any 
manipulation of rent. It is by lessening the cost of production <, 
and not by appropriating the surplus that prices must be reduced. ; 
The cost of production can be lessened only by using improved] 
methods. The successful use of improved methods depends ; 
upon increasing consumption and higher wages. Therefore the 
improvement of the social condition of the masses and the general 
advancement of society must be sought in the influences which 
promote the advance of real wages and not in any schemes for 
abolishing rents. 

The question of economic rent then, maybe summarized thus : 
(i) That rent is a net surplus arising from the use of land as an 
economic instrument ; (2) That rent tends to equal the differ- 
ence in the productive utility of the different portions of land 
used for the same purpose in the same community or competing 
group ; (3) That the economic use of inferior land simulta- 
neously with superior, and hence the payment of rent, finally de- 
pends upon the employment of improved methods of production 
(use of capital) ; (4) That the successful use of improved meth- 
ods depends upon the increased consumption of wealth per capita 
of the community or a higher social standard of living among 
the masses and, that rent is not the cause of low wages, but 
the economic consequence of high wages ; (5) That since rent is 
an economic surplus the existence and increase of which depends 
upon the social progress and increasing wages of the laboring 
classes, it is in the broadest sense the interest of the landowning 
class to promote in every way possible the economic and social 
advancement of the laboring classes. 



CHAPTER V. 
THE LAW OF INTEREST. 

Section I. — Popular Theories of Interest, 

Interest is economically analogous to rent ; it sustains pre- 
cisely the same relation to capital that rent does to land. In con- 
sidering the question of interest, therefore, we have to deal with 

I essentially the same economic problem we considered in the last 
chapter. All the popular objections urged against the payment 
of rent as a burden to the community, an exaction from the laborer, 
etc., are presented with equal force against the payment of inter- 
est. And conversely, the same reasons that justify the payment 
of rent apply equally to that of interest. Scientifically therefore, 
all that is necessary in dealing with the question of interest is to 
apply to capital the law already stated in regard to land. 

I Unfortunately however, in this instance, as in almost every 
other question in economics, a simple direct statement of the sub- 
ject is practically impossible without first clearing away some of 
the confusion in which it has been involved. The utter lack of 
logical consistency which characterizes the body of economic 
doctrines authoritatively taught is such that there is practically 
no mutual relation between the different departments of the sub- 
ject. There being no recognized common centre of movement, 
no order of relation and mutual dependence of phenomena, and 
hence no accepted general law which they shall obey, each phase 
of the subject is discussed for the most part as if it had no neces- 
sary relation to the whole but were governed by laws peculiar to 
itself. Thus we find Ricardo and other English economists 
teaching that profits are governed by a law entirely different 
from that which regulates rent. And now more than half a 
century later we have Mr. Walker declaring the same thing with 
regard to interest. 

I 237 



238 WALKER'S VIEW OF INTEREST. 

This is the more astonishing in Mr. Walker's case, because he i 
makes special claim to having presented a logical order of distri- : 
bution.^ When dealing with the question of rent, which he puts i. 
first, he never tires of proclaiming the doctrine that rent does : 
not affect the price of the product, since that is determined by ;i 
the use of no-rent land ; yet he fails to recognize this principle 1 
in the case of interest, and emphatically declares that " there is 1 
not any no-interest capital," and says : ;i 

"We have seen that the whole theory of rent rests on the % 
assumption that there is a body of no-rent lands. . . . In ;i 
the theory of capital there is nothing to correspond to this. | 
The economist does not find any no-interest capital. In theory, | 
all capital bears an interest, and all portions of capital bear i 
equal interest. . . . But what has been stated shows 
how fundamentally the theory of interest differs from that of | 
rent."' 

Why should we assume that " there is a body of no-rent lands " 
and that " there is not any no-rent capital " ? Upon what 
ground should we assume that " all portions of capital bear equal 
interest " ? Surely we have a right to demand some explanation, 
some pertinent facts in experience, or a well-established principle 
before we can be expected to accept such sweeping affirm- 
ations. If, as Mr. Walker says, "interest forms a part of 
the price of all products,"^ then all interest is a tax upon the 
consumer, and the wealth of the rich, so far as interest is con- 
cerned, is obtained at the expense of the poor. It will not be 
difficult to show that Mr. Walker's position on interest, which is 
essentially the same as that of Marx on profits, and Geo-rge on 
rent, rests like theirs on pure assumption unsupported by estab- 
lished facts or verified principle. When discussing profits he in- 
sists that there is no-profit capital and says : 

" The employers of the lowest grade — the no-profit employers, 
as we have called them — must pay wages sufficient to hire labor- 
ers to work under their direction. These wages constitute an es- 
sential part of the cost to the employer of the production of the 
goods. The fact that these wages are so high is the reason why 

^ " Political Economy," pp. 193, 248, 
^ Ibid., pp. 222, 223. 
3 Ibid., pp. 235, 236, 



SIMILARITY OF INTEREST AND PROFIT. 239 

these employers are unable (their skill, etc. being the same) to 
realize any profit for themselves." ' 

If we ask Mr, Walker why there are " no-profit employers/* 
which of course means no-profit capital, he will reply, as he has 
at length, that it is because, under free and active competition, 
prices tend to equal the cost of production under the greatest 
disadvantage.^ If there is any economic power by which prices 
can be forced down to the no-profit point and to the no-rent 
point, why can they not, by the same power, be forced down to 
the no-interest point ? If the owner of the poorest tools in use 
is powerless to demand a price sufficiently high to yield a profit 
upon the capital invested in those tools, by what force in 
economics can he demand a price high enough to yield interest 
for that capital ? Obviously the same power that will enable 
him to insist upon the one will enable him to obtain the 
other. 

When considering the law of prices,^ we saw that, at the price- 
determining point (producing at the greatest disadvantage), each 
factor in production obtained only the exact equivalent of the 
cost of its contribution to the product ; that is to say, that no 
factor in production can add more value to the product than it 
loses in the process. Consequently the price of the product 
cannot be greater than the equivalent of the aggregate cost of the 
factors jointly employed in its production. Clearly if there is 
any power by which more can be demanded from the product for 
capital than the equivalent of what it gives (the cost of maintain- 
ing its productive efficiency), the same power will enable the 
consumer and the laborer to do likewise. It is only upon the 
principle that capital employed under the greatest disadvantage 
will barely yield the cost of maintaining its productive efiiciency, 
that no-rent land and no-profit employers are possible. It is 
solely because their product sells at cost that they occupy the 
datum-line or price-fixing position. Manifestly any social con- 
ditions or economic law which will make no-rent land and no- 
profit factories possible, will also make no-interest capital 
possible. 

* " Political Economy," pp. 240, 24I. 
^ Ibid., pp. 236-242. 
^Chapter iv., pp. 20-22. 



240 NO-INTEREST CAPITAL. 

Moreover, facts everywhere sustain this theorem. There is 
probably no M^ell-established industry, either in agriculture, man- 
ufacture, or commerce, in which there is not permanently a cer- 
tain amount of no-interest capital employed. There are hun- 
dreds and perhaps thousands of small farmers, merchants, and 
manufacturers in this and every other commercially advanced 
country, who remain in business for years and barely obtain a 
living and keep their capital intact. Nor do I refer to those re- 
sults of bad judgment and inexperience which Mr. Walker calls 
"accidents,"^ but only to capital which is so employed as the 
necessary result of economic law. 

Mr. Walker may reply that no one will accumulate wealth and 
invest it in production unless he can obtain a reward at least to 
the extent of interest. Even if this were literally correct and 
without an exception, it would not prevent the use of no-interest 
capital. Indeed if capital were never invested for less than the 
maximum profit the use of the no-interest capital would be not 
only possible but inevitable. Through the concentration of cap- 
ital and the use of improved methods, maximum-profit yielding 
capital is constantly being reduced to the no-interest point. 

Suppose for example, that in the manufacture of cotton cloth 
half a million dollars are invested in the plant which at the time 
is of the most modern type, and that the capital not only yields 
interest but a profit. In the course of a few years a great im- 
provement in machinery is discovered by the use of which the 
cost of cotton cloth is greatly reduced. Through the fall in price 
resulting from the use of this new machinery, the profits of those 
who still produce by the previous methods are entirely destroyed. 
The capital which at first yielded a high profit ceases to yield 
any thing above the bare cost of production — wages, raw material, 
and actual wear and tear. Consequently, if this capital continues 
to be employed it must be used without profit or interest. 
Moreover, when through still further improvements the price falls 
too low for this now inferior machinery to be used without loss, 
the capital invested in the tools of the next grade above will fall 
to the no-interest point, and so on. Thus, while it may be true 
that no capital is originally invested without interest or even high 

' " Political Economy," p. 235. 



MOVEMENT OE CAPITAL, . 24 1 

profit, it constantly tends towards the no-interest point through 
the use of improved methods. This does not mean, however, 
that the same capital, or the capital of the same persons, continues 
to be employed at the no-interest point ; on the contrary, such 
capital is constantly struggling to move from no-interest to high- 
profit uses. This however, is often difficult to do without loss. 
If the capital is invested in machinery which is reduced to the 
no-interest point by the competition of larger concerns using su- 
perior methods, then it can only be transferred to high-profit uses 
by being invested in the superior methods and producing on 
a larger scale, and this usually involves a larger amount of capi- 
tal, the lack of which often makes such transfer impossible. Cap- 
ital is often thus retained in the same business for a considerable 
time after it ceases to yield interest, partly in the hope of doing 
better and partly from fear of a loss of the principal in any sud- 
den transfer to nev\^ fields. From these and many other causes 
which are constantly in operation, especially among small pro- 
ducers, capital is often continued in a business, not merely until 
it reaches the no-interest point, but in many cases until it is 
; forced by competition to the losing point. Thus, while capital is 
constantly struggling to move from no-interest to high-profit uses, 
that portion of it which is used under the poorest conditions is 
always no-interest capital. 

If prices could never fall below the interest-paying point for 

the capital invested in the poorest tools, then the use of improved 

machinery would not cheapen commodities, but would simply 

increase profits. Nothing but working at a loss or the failure to 

obtain interest will enforce the disuse of the most inferior instru- 

[ments, and permit prices to fall to the cost of producing with 

I superior methods, and thus compel the advantages of improved 

I machinery and concentrated capital to pass to the community in 

lower prices instead of remaining in the hands of capitalists as 

higher profits. 

This is what is constantly taking place in every progressive 
community. There is scarcely a machine-using industry in which 
capital has not been reduced from the high-profit to the no- 
jpterest point several times over during the present century. 
Take, for example, the cotton industry. In the first quarter of 

this century, capital invested in machinery that could produce 
16 



242 MOVEMENT OF INTEREST. 

calico at 30 cents a yard would yield a high profit. And before 
1830 the capital invested in the same machinery could not yield 
interest, nor even be used without loss, the price of calico having 
fallen to 17 cents a yard. And the high-profit capital of 1830 
reached the no-interest or losing point by 1843, when the price 
had fallen to 12 cents a yard. And the high-profit capital of 1843 
again reached the no-interest point by 1850, when the price had 
fallen.to 9^ cents a yard ; and so on, until to-day the capital can- 
not receive interest which is unable to produce the same com- 
modity at less than 5 cents a yard. Thus the whole circle from 
high-profit to no-interest has been traversed several times over 
during the present century. In fact, every dollar's worth of 
capital invested in the print-cloth business since the invention 
of the power-loom, that could not produce print-cloth at 4 
cents a yard, has been reduced to the no-interest point.* Since 
Mr. Walker admits that this takes place in the sphere of both 
profits and rents, why he should fail to see that through the 
same law it must also take place in the sphere of interest, is not 
a little surprising. He appears to have fallen into the same error 
that the English economists committed in regard to rent and 
profits. They saw that rent is paid from a surplus above the 
cost, and hence is not an addition to the price of the product ; 
while they regard profits as the reward for the abstinence of the 
capitalist, and hence a necessary addition to the price.' Mr. Walker 
saw their error in not regarding profits as a surplus similar to 
rent, yet he has repeated the same oversight regarding interest. 
Indeed, he has taken their formula for profits and used it as a 
definition of interest, and says : " Capital, as we have seen, is the Ji 
result of saving. Interest, then, is the reward for abstinence." " i- 

^ In the iron industries there are many large properties that are barely up to 
the level of no-interest use without loss to-day which a few years ago yielded 
high profits. The introduction of successful inventions has in many instances 
reduced millions of dollars' worth of machinery not merely to .the no-interest 
point, but forced it out of use altogether. 

' "Wealth of Nations," book i., chapter vi., p. 39 ; chapter vii., p. 42; 
book v., chapter ii,, p. 691. Rica'rdo's " Works," pp. 39, 68. McCulloch's ■ 
"Principles of Political Economy," p. 42. Mill's "Principles of Political 
Economy," vol. i., pp. 569-72. 

^ " Political Economy," p. 224 ; also p. 66 ; cf. Mill's "Principles of Political 
Economy," vol. i., p. 495. 



CAPITAL NOT DUE TO ABSTINENCE. 243 

This definition is as unfortunate for interest as it was for profit, 
and for the same reason. If all capital is the result of abstinence, 
and all abstinence is necessarily rewarded by interest, then not 
only would all capital receive interest, but the interest would be 
in proportion to the degree of sacrifice or abstinence involved in 
its accumulation. The difficulty with this view is that it is incon- 
sistent with the facts. In the first place, there is no inductive 
warrant for the broad assumption that all capital is the result of 
abstinence. As we have already shown, much the larger portion 
of capital in use to-day has been accumulated without any 
conscious abstinence whatever. It is undoubtedly true that in all 
countries accumulations at first represent abstemiousness and 
sometimes painful sacrifice. The amount thus accumulated, 
however, represents a small fraction of the productive capital of 
to-day. Take, for example, the Rothschilds, Goulds, Vander- 
bilts, Sages,, and x\stors. While it may be true that the first few 
thousands of their accumulations represent abstinence, it is doubt- 
ful if one per cent, of the capital accumulated after the first half 
million represents abstinence in the remotest sense. From what 
do these gentlemen abstain ? what gratification that wealth can 
give do they forego ? It is because the greater part of their 
capital is not due to abstinence, but to the surplus earnings of 
the capital already in use, that it increases much faster after 
they cease to practise abstinence than it ever could before. 

If interest were only the reward for abstinence, then all the 
capital which is accumulated without abstinence would receive 
no interest ; whereas that is just the capital which most uniformly 
receives the highest interest, while the capital of the small farmers, 
manufacturers, and merchants, which is the result of the most 
painful abstinence, is that which is most generally used without 
interest. In fact, the whole idea of a reward for abstinence is 
fallacious. Nature does not reward abstinence ; she only rewards 
effort. Capital does not receive a reward because it represents 
parsimony, but solely because it aids in production ; and its 
reward depends entirely upon the degree of its exceptional pro- 
ductive efficiency. And from the causes above enumerated it 
(tends towards the no-interest point directly as improved methods 
are introduced, without regard to whether it was painfully or 
unconsciously accumulated. 



244 RENT, INTEREST, AND PROFIT. 

Section 1 1. — The True Theory of Interest, 

If we bear in mind the conclusions already Veached regarding 
prices, and the nature and function of capital, there need be no 
difficulty in understanding the question of interest. That inter- 
est and rent are of the same economic species is apparent from 
their every characteristic. They are both paid in the same way, ^ 
and for the same reason — namely, to obtain the use of capital 
belonging to another. Had land and other forms of capital 
always been used by those who owned them, no distinction 
between rent, interest, and profits would ever have been made. 
It was not until the different productive factors began to be used 
by those who did not own them that any such distinction became 
necessary. Manifestly, when the producer owned all the land and 
other instruments he used, all the surplus product resulting from ! 
their use was his, and it might be designated either as rent, inter- 
est, or profits ; but there could be no reason for calling differ- , 
ent portions of it by different names. But when the productive f 
instruments began to be owned in varying degrees by different | 
persons, that portion of the surplus product resulting from the, 
use of each instrument naturally belonged to the owner of that j 
instrument. In order to distinguish between that portion which { 
goes to the owners of the different instruments, it was necessary 
to designate them by different terms. Instead, therefore, of rent, 
interest, and profit being economically different from each other 
and governed by different laws, it will be seen that they are 
simply different portions of the same aggregate surplus and are 
governed by the same general principle. 

Let it be assumed for illustration that A, B, and C represent 
three classes of producers contributing to the supply of the same 
market, A owning all the land and .other instruments he uses, B 
owning his implements but hiring his land, and C hiring both 
land and' instruments. And for the sake of simplicity let it be 
further assumed that, through the superior quality of their land 
and tools, they produce 15 per cent, more than their most inferior 
competitor (he using the most inferior methods), and conse- 
quently have a surplus of 15 per cent. Under these conditions 
it is quite clear that A, owning all the means of production, will 
have the whole surplus ; he will obtain 15 per cent, more for his 



THE LAW ILLUSTRATED, 245 

product than it cost him in wages, raw material, and wear and 
tear of implements. B, not owning the land, has to give 5 per 
cent, of his product to the landowner as rent. Consequently his 
production being the same, his surplus will equal that of A, minus 
the amount paid for rent (15 — 5 per cent.). The case of C is 
like that of B, only more so. Owning neither the land nor the 
instruments, he has to hire both ; hence, for the same reason that 
he must pay 5 per cent, of his product to the landowner for the 
use of the land, he must pay 5 per cent, of it to the capitalist for 
the use of the capital in tools and stock ; while the selling price 
and all other costs being the same, his surplus will equal that of 
B, minus the rent, and that of A, minus rent and interest 
(15 — 10 per cent.). They all produce at 15 per cent, more 
with the same investment than those who use the poorest tools, 
and hence create a surplus of 15 per cent. But A, who owns all 
the means of production, receives all the surplus ; while B, who 
does not own the land, has to give one third of the surplus to the 
landowner ; and C, who owns neither land nor capital, has to 
give one third to the landowner and one third to the capitalist, 
leaving only one third for himself. 

Clearly therefore, rent, interest, and profits all come from the 
same source — the economic surplus, — the only difference being 
that rent and interest are stipulated portions of the general sur- 
plus, while profit is the contingent remainder. In the case of A 
the whole surplus is contingent profit. In the case of B rent is 
stipulated and the surplus, minus rent, is contingent profit. And 
in the case of C, both rent and interest being stipulated, only the 
contingent remainder after these are paid is profit. There is 
manifestly no economic force by which C can add his interest to 
the price of the product or abstract it from the wages of the 
laborer, which will not enable B to do the same with rent. For 
the same reason that prices tend to equal the cost of producing 
with the poorest land in use without the payment of rent, they 
will equal the cost of producing with the poorest tools in use 
without the payment of interest. 

If the poorest land and the poorest tools and most inferior 
■management were all used together, we should find the no-rent 
landowner, no-interest capitalist, and no-profit entrepreneur all 
represented in the same farm, factory, or other enterprise. It is 



246 PROFIT A CONTINGENT REMAINDER. 

because the best instruments and skill are sometimes applied to 
the poorest land, and the best land is sometimes used with the 
poorest skill and management, that we often find those who pay 
high rents failing to obtain interest or profits, while those paying 
less rents can pay interest and make profit. In other words the 
surplus, being the result of the superiority of the land, instru- 
ments, or skill over the poorest in use, is (through the natural 
equity of economic law) distributed among the owners of those 
factors which produce it. If it is all due to the land, it all goes 
to rent ; if it is all due to the instruments, it all goes to interest ; 
if it is all due to management of the entrepreneur, it all goes to 
profits ; if it is equally due to them all, it will be evenly divided 
in rent, interest and profits. Thus whichever way we consider 
the subject, interest is economically identical with rent, it being to 
capital precisely what rent is to land. In other words, rent and 
interest are simply differentiated portions of profit — stipulated 
disbursements of the aggregate economic surplus, — while the en- 
trepreneur's profit is the undivided contingent remainder.^ 

It may be said that the rent of B and the rent and interest of C 
are indispensable items in the cost of production. This is correct, 
but they are not indispensable items in the cost of A, with whom 
B and C have to compete. Since B and C can make no charge to 
the community for any cost which A is willing to do without, the 
only economic means by which B and C can be reimbursed for 
their rent and interest is by enlarging their surplus through in- 
creased production. Indeed that is the only reason rent or interest 
is ever paid. No one will pay rent for the productive use of land 
unless he can obtain an advantage by so doing. The only reason 
a person will pay a dollar a foot for land in one place when he can 
get it for a dollar an acre in another is, that by paying the higher 
rent he saves a greater expense in some other way. For exam- 
ple, there is plenty of land admirably suited for market garden- 

' The producer who uses his own capital never receives interest ; if he has any 
surplus over the necessary cost of production, which includes the remuneration 
for his own services — it is profit. Because the interest paid for the use of capi- 
tal is a definite percentage, it has become more or less habitual in business 
circles to speak of profits as interest up to a certain amount. Hence, we some- 
times hear it said that a concern has not made the interest on its capital. All 
this expression means is that the profit or surplus has not been equal to what 
they would have had to pay as interest if they had borrowed the capital. 



INTEREST NOT A PART OF COST. 247 

ing which can be had for nearly nothing. But it is so far from 
the city market that the cost in transportation and waste in prod- 
uct would be much greater than the high rent paid for land by the 
market gardener in the suburbs of the large city. Instead of the 
high rent increasing the cost, it simply obviates the necessity of 
the still greater cost that would be involved in using land that 
could be obtained without rent or at a lower rent. 

The same is true of interest. The only motive for borrowing 
capital is to increase the contingent surplus by more than the 
amount to be paid as interest. Whether or not this will be 
achieved will largely depend upon the correctness with which the 
possible surplus is calculated. If the surplus is overestimated, 
rent and interest may absorb it all, or they may even be greater 
than the total surplus, in which case the entrepreneur will suffer a 
net loss. This is what occurs when the profits of small farmers 
are all absorbed by the interest on their mortgages, and those 
of small manufacturers and merchants by the interest on their 
borrowed capital, of which we hear so much.^ The only means, 
therefore, by which rent, interest, and profits can be obtained is 
the creation of a surplus by producing at less than the maximum 
cost. The non-landowning capitalist can only have a profit by 
creating a surplus more than equal to the rent. The entrepreneur 
can only have a profit by creating a surplus more than equal to 
both rent and interest. Interest then is not the necessary reward 
for abstinence, nor is it a part of the price-fixing cost of produc- 
tion, but it is simply that portion of the economic surplus which 
is paid for the use of capital (tools) owned by another ; and since 
it can neither be added to the price of commodities nor sub- 
tracted from the wages of labor, it cannot be a tax upon the com- 
munity. 

Interest is not only not injurious to the community, it is a 
positive advantage. It is one of the most effective means of 
concentrating capital and bringing improved methods of produc- 
tion into successful operation. There are thousands of millions 
of dollars invested in railroads, steamships, and other modern 
enterprises, which could not have been utilized for such purposes 

* Over sixty per cent, of the capital invested in railroads in this country in 
1888 failed to yield a profit, because the surplus was all absorbed in paying the 
interest on the bonds. 



248 ECONOMIC CHARACTER OF INTEREST. 

without the payment of interest. It is doubtful if there is a rail- 
road in existence that could have been built with the capital 
owned by its actual projectors. The payment of interest was the 
only means of obtaining the capital from those who had neither 
the wisdom, energy, nor capacity to put it to such use. Indeed 
such enterprises as the Suez Canal, the great railroad and steam- 
ship lines, Atlantic cables, petroleum pipe-lines, and the modern 
telegraph, would have been utterly impossible but for the con- 
centration of capital which the payment of interest made possi- 
ble. Interest, instead of being a burden to the community, is 
thus one of the great wealth-cheapening agencies of civilization. 



CHAPTER VI. 

THE LAW OF PROFIT. 

Section I. — Orthodox Economics Responsible for Socialistic 

Theories. 

Since the time of Adam Smith and Ricardo economists have 
generally taught : (i) that profit is a necessary part of the price 
of the commodity to the consumer ; (2) that profit can rise only 
as wages fall. In supporting the first proposition Mill devotes 
several pages to showing that, in proportion as the capital ex- 
pended in production is invested in machinery, buildings, etc., 
profit becomes an increasing item in the cost of production, and 
consequently an increasing addition to the price of the com- 
modity.^ 

According to this view, when any commodity goes through a 
considerable number of hands during the process of manufacture, 
the price paid by the consumer largely consists of profits. For 
example, if iron goes through ten different stages before it is con- 
verted into steel, and the rate of profit is five per cent., about two 

^ " The flax-spinner, part of whose expenses consists of the purchase of flax 
and of machinery, has had to pay, in their price, not only the wages of the labor 
by which the flax was grown and the machinery made, but the profits of the 
grower, the flax-dresser, the miner, the iron-founder, and the machine-maker. 
All these profits, together with those of the spinner himself, were again advanced 
by the weaver in the price of his material, linen yarn ; and along with them the 
profits of afresh set of machine-makers, and of the miners and iron-workers who 
supplied them with their metallic material. All these advances form part of the 
cost of production of linen. Profits, therefore, as well as wages, enter into the 
cost of production, which determines the value of the produce." — " Principles of 
Political Economy," vol. i., p. 568. Cf. " Wealth of Nations," book v., ch. ii.» 
pp. 691, 692. 

249 



250 ENGLISH POSTULATES. 

thirds of the price of the finished product would consist of 
profits. It will be seen that this theory supports the popular no- 
tion that all so-called middle-men are parasites upon the product 
of the community. If this were true, heroic measures for their 
elimination would certainly be in order. 

The second postulate — that profit can rise only as wages fall ^ 
— implies that the wealth of the capitalist simply represents the 
poverty of the laborers. The employing classes are thus taught 
that their interest invariably lies in keeping wages low, and the 
laboring classes are just as effectually taught that the only way to 
increase wages is to reduce profit. The natural effect of this 
doctrine is seen in the antagonistic attitude which these two 
classes assume towards each other. 

As a legitimate outcome of the Engli^i doctrine — that profits 
can only increase as wages diminish, — we have the theory, first of 
Rodbertus, that the laborer receives " a smaller fraction of the 
product in proportion as his productiveness increases," and hence 
becomes more dependent as society advances^; and next, the 

^ " There can be no rise in the value of labor without a fall of profits." — Ri- 
cardo's " Works," p. 23. " Can any point be more clearly established than that 
profits must fall, with a rise of wages?" — Ibid., p. 63, "It has been my 
endeavor to show throughout this work, that the rate of profits can never be in- 
creased but by a fall in wages." — Ibid., pp. 74, 75. "Whatever raises the 
wages of labor lowers the profits of stock." — Ibid., p. 122. See also ibid., pp. 
60, 65, 93, 136. " The whole produce of industry Viwder deduction of rent is di- 
vided between laborers and capitalists The proportion falling to the 

capitalist is increased when that falling to the laborers is diminished, and dimin- 
ished when it is increased Mr. Ricardo has endeavored to show .... 

that a rise of profits can never be brought about, except by a fall of proportional 
wages, nor a fall of profits, except by a corresponding rise of proportional wages." 
— McCulloch's "Principles of Political Economy," pp. 192, 193. "We thus 
arrive at the conclusion of Ricardo and others, that the rate of profits depends upon 
wages ; rising as wages fall and falling as wages rise." — Mill's " Principles of Po- 
litical Economy," vol. i., p. 512. " Wages equal \\vq, product of industry minus 
the three parts (rent, interest, and profits) already determined in their nature and 
amount." — Walker's " Political Economy," p. 248. "What remains after sub- 
tracting the aggregate price paid for the use of capital .... is obviously the 
share of labor." — Sidgwick : " Principles of Political Economy," p. 322. 

2 ' ' Rent and wages are thus shares into which the product is divided so far as 
it is income. Whence it follows that the larger one share is the smaller must 
be the other. If the rent takes a larger share of the product, a smaller share 
must remain for wages. As one share varies in size so must the other in inverse 



RODBERTUS AND MARX. 2$ I 

doctrine of Karl Marx, that all forms of rent, interest, and profit 
are robbery.^ These two formulce have become the accepted basis 
of the whole socialistic movement, so rapidly increasing in all civil- 
ized countries. By a critical examination of the process of eco- 
nomic production, Marx endeavors to scientifically demonstrate 
how, in the nature of the capitalist system, unpaid wages consti- 
tute the source of all rent, interest, and profit. It must be admitted 
that if this proposition can be scientifically sustained, the theory 
of socialism — which demands the public ownership of all the 
means of production — cannot be successfully disputed. And on 
the contrary, if this proposition can be shown to be erroneous, 
the whole economic fabric of socialism falls. It is of the utmost 
importance, therefore, in discussing the question of profit, that 
the claim of this theory should be fully considered. 

Section 1 1. — Marxs Theory of Exploitation. 

After an elaborate explanation of his theory of value which is 
substantially that of Ricardo ; namely, that commodities and la- 
bor exchange on the basis of the quantity of labor expended in 
their production,^ Marx illustrates the process of exploiting the 

ratio The share of the working class, that is of the great majority of 

society, does not remain a fixed unchangeable fraction of the product in pre- 
cisely the same proportion as the productiveness increases." .... (Therefore, 
* ' There must be produced that fatal contradiction in society, that the more equal 
and the more free all its members become before the law and politically, the 
more unequal and dependent are the majority of the working classes economi- 
cally The conclusion follows that the existing form of division of the 

national product cannot continue." — Views of Rodbertus translated from the 
work of Dr. Rudolf Myer ; Appendix to Hyndman's '.' Historical Basis of 
Socialism." 

^ " The capitalist mode of production and accumulation, and therefore capi- 
talist private property, have for their fundamental condition the annihilation of 
self -earned private property ; in other words, the expropriation of the laborer." 
— "Capital," p. 800. 

' " Commodities, therefore, in which equal quantities of labor are embodied, 

or which can be produced in the same time, have the same value As 

values, all commodities are only definite masses of congealed labor time." 
— " Capital," p. 6. " So far as it (labor-power) has value, it represents no more 
than a definite quantity of the average labor of society incorporated in it. . . . 
Given the individual the production of labor-power consists in his reproduction 
of himself or his maintenance." — Ibid., p. 149. 



252 MARX'S THEORY STATED. 

laborer by the manufacture of cotton yarn, which he states with 
great precision, and says : 

" We assumed on the occasion of its sale that the value of a 
day's labor power is three shillings, and that six hours' labor are 

incorporated in that sum The same quantity of labor is 

also embodied in a piece of gold of the value of three shillings. 
Consequently by the mere labor of spinning, a value of three 
shillings is added to the cotton. Let us now consider the total 
value of the product, the ten pounds of yarn. Two and a half 
days' labor have been embodied in it, of which two days were 
contained in the cotton and in the substance of the spindle worn 
away, and half a day was absorbed during the process of spin- 
ning. This two and a half days' labor is also represented by a 
piece of gold of the value of fifteen shillings. Hence, fifteen shil- 
lings is an adequate price for the ten pounds of yarn, or the price 
of one pound is eighteen pence. Our capitalist, stares in astonish- 
ment. The value of the product is exactly equal to the value of 
the capital advanced. The value so advanced has not expanded, 
no surplus value has been created, and, consequently, money has 
not been converted into capital." ^ 

The capitalist is then described as being in any thing but a 
tranquil state of mind at the result ; and after giving some weak 
but truly othodox reasons why he should have had a profit, he is 
represented as leaving "all such like subterfuges and juggling 
tricks to the professors of political economy who are paid for it," 
and as turning his attention to concocting a new scheme for the 
creation of surplus value — in which he succeeds. The capitalist 
then analyzes the factors in production and finds that no surplus 
can be squeezed out of the raw material or the machinery ; hence 
it must be exploited from the labor-power. This he decides can 
be done by making the laborer work twice as many hours for the 
same wages. He then resumes business on his twelve-hour plan 
with complete success, the process of which Marx states thus : 

" The laborer therefore finds in the workshop the means of 
production necessary for working not only during six but during 
twelve hours. Just as during the six hours' process our ten pounds 
of cotton absorbed six hours' labor and became ten pounds of 
yarn, so now twenty pounds of cotton will absorb twelve hours* 

^ " Capital," p. 171. 



MISLEADING ILLUSTRATIONS, 253 

labor and be changed into twenty pounds of yarn. Let us now 
examine the product of this prolonged process. There is now 
materialized in this twenty pounds of yarn the labor of five days, 
of which four days are due to the cotton and the lost steel of the 
spindle, the remaining day having been absorbed by the cotton 
during the spinning process. Expressed in gold the labor of five 
days is thirty shillings. This is therefore the price of the twenty 
pounds of yarn, giving as before eighteen pence as the price of a 
pound. But the sum of the values of the commodities that 
entered into the process amounts to twenty-seven shillings. 
The value of the yarn is thirty shillings. Therefore the value of 
the product is one ninth greater than the value advanced for its 
production ; twenty-seven shillings have been transformed into 
thirty shillings ; a surplus-value of three shillings has been 
created. The trick has at last succeeded ; money has been con- 
verted into capital." ^ 

Thus, according to Marx, in the spinning process six shillings 
of value have been added to the twenty pounds of yarn by the use 
of labor, for which the laborer has received only three shillings, 
and the laborer has been exploited of half he produced. Through- 
out the whole discussion in the remaining 625 pages of his book, 
Marx never tires of reminding the reader of this fact.^ It must 
be admitted that " the trick has at last succeeded," and it almost 
looks as if the capitalist had performed it ; but let us examine the 
process a little closer. 

In the first instance the case stood : 15s. value of yarn = los. 
raw cotton -|- 2s. machinery + 3s. labor power. If we ask why 
the value of the yarn was just 15 shillings, Marx promptly ex- 
plains that it is because only " fifteen shillings were spent in the 
open market upon the constituent elements of the product, or 
what amounts to the same thing, upon the factors of the labor 
process." ^ 

Let us examine the twenty pounds of yarn produced under the 
" prolonged process " in the light of the law Marx has applied to 
the production of the ten pounds. Here the different items of 
cost were as follows : 

i ^ " Capital," pp. 175, 176. 

'^ Ibid., pp. 176, 198, 200, 201, 203, 211, 219, 220, 222, 289, 533, 541, 542, 
■543, 544, 550, 592. ^ Ibid., p. 171. 



254 SURPLUS VALUE FALLACY. 

Raw material, 20s. 

Wear and tear of machinery, .... 4s. 
Twelve hours' labor power, 3s. 

Total cost, 27s. 

Thus, according to the above law, the total value of the product 
is twenty-seven shillings. " Oh no," exclaims Marx, that would 
give no surplus value. He admits that the cost of the yarn in 
this case is only twenty-seven shillin'gs, but he insists that its value 
is thirty shillings.^ According to Marx then, his economic law 
of value works thus : los. -j- 2s. ■\- 3s. cost = 15s. value ; while 
20s. -f- 4s. -I- 3s. cost = 30s. value. That is to say, 15s. equals 
15s., but 27s. equals 30s. Now by what application of his own 
law of value, according to which fifteen shillings' cost can only 
produce fifteen shillings' value, can he make twenty-seven shil- 
lings' cost produce thirty shillings' value ? Clearly if the twenty 
pounds of yarn, the production of which only cost twenty-seven 
shillings, can have a value of thirty shillings, then by the same 
law the ten pounds of yarn whose production cost fifteen shillings 
can be sixteen shillings and six pence. To assume that, while a 
cost of fifteen shillings cannot yield a value of more than fifteen 
shillings, a cost of twenty-seven shillings can yield a value of 
thirty shillings, is to violate alike the laws of logic and the rules 
of arithmetic. Manifestly, surplus value was no more created in 
the production of the twenty pounds of yarn than in that of the 
ten pounds. The three shillings here paraded as surplus value is 
a pure invention of Marx. True, " the trick has at last succeed- 
ed " ; but it was performed by Marx and not by the capitalist. 
It is obviously a trick of metaphysics and not of economics. The 
only exploitation here revealed is the exploitation of socialistic 
credulity, and not of economic labor power. A theory according 
to which 15s. value = 15s. cost, while 30s. value = 27s. cost, 
needs only to be stripped of its metaphysical garment in order to . 
be rejected. 

The fallacy here so boldly flaunted — and made to do service as 
the scientific basis for a radical reconstruction of society — can be 

^ " The sum of the values of the comnaodities that entered into the process 
amounts to twenty-seven shillings. The value of the yarn is thirty shillings. 
. . . A surplus value of three shillings has been created." — "Capital," pp. 
175, 176. 



RELATION OF LABOR TO VALUE. 2^<, 

exposed in many ways. It is true that in Marx's second case the 
laborer is made to produce twenty pounds of yarn for the same 
wages which he previously received for producing ten pounds. 
But this change of labor cost, according to Marx's own theory, 
would not create a surplus value of three shillings for the capital- 
ist ; on the contrary, it would reduce the price of the product 
three shillings to the consumer. It is a well-established law in 
economics that the value of commodities tends to diminish as the 
ratio of product to cost of labor increases. That Marx recognizes 
this principle, when discussing other phases of the subject, is 
clear from the following statement : 

"Let us assume that some invention enables the spinner to 
spin as much cotton in six hours as he was able to spin before in 
thirty-six hours. His labor is now six times as effective as it was 
for the purposes of useful production. The product of six hours' 
work has increased sixfold, from six pounds to thirty-six pounds. 
But now the thirty-six pounds of cotton absorb only the same 
amount of labor as formerly did the six pounds. One-sixth as 
much new labor is absorbed by each pound of cotton, and con- 
quently, the value added by the labor to each pound is only one- 
sixth of what it formerly was." ^ 

This is exactly what occurred in the hypothetical case just 
considered. When the laborer, in Marx's second case, produced 
twice as much yarn for three shillings as he produced in the first, 
he only added half as much value to each pound of yarn he pro- 
duced. Hence, for the same reason that he added three shillings 
to the value of the ten pounds of yarn, he only adds three shil- 
lings to the value of the twenty pounds ; and, consequently, its 
value can only be twenty-seven shillings, and no surplus value is 
created. 

Suppose for illustration, that, instead of doubling the length of 
the laborer's working day, the price of raw cotton should fall fif- 
teen per cent. The cost of the different factors in the produc- 
tion of twenty pounds of yarn would then be as follows : 

Raw material, 17s. 

Cost of wear and tear of machinery, . . 4s. 
Twelve hours' labor, 6s. 

Total cost, . . . , . . 27s. 
' "Capital," p. 183. See also pp. 151, 171, 172, 175, 176, 194, 195, 196. 



256 MARX'S THEORY BREAKS DOWN. 

The laborer in this instance receives twice as much as when 
working for Marx, but the result is exactly as before, the only dif- 
ference being that the three shillings is saved on the cost of raw 
material, instead of the cost of labor power. Would Marx claim 
that the value of the yarn is now thirty shillings ? Certainly not. 
On the contrary, he would insist that it could not possibly be 
more than twenty-seven shillings since, as he repeatedly declares, 
auxiliary capital and raw material can only add to the value of 
the product the value which they lose in the process — /. e. the cost 
of replacing them,^ — and every fall in the cost of raw material 
shows itself in a fall in the price of the product. Indeed, were 
this otherwise, cheap raw material and improved machinery would 
have no influence in reducing the price of commodities. If then, 
the twenty-seven shillings' cost in this instance could only yield 
twenty-seven shillings' value, by what rule of logic or experience 
can it be assumed that, by transferring three shillings of the cost 
from the labor power to the raw material, the twenty-seven 
shillings' cost would yield thirty shillings' value ? As a matter of 
economic law, it can make absolutely no difference to the value 
of the product whether the twenty-seven shillings' cost is all in 
one item, or is spread over a hundred items ; if it will yield a value 
of thirty shillings when it is all spent in labor power, it will do 
the same when it is all spent in raw material and machinery, and 
nothing is paid for labor. Clearly therefore, the attempt of 
Marx to show that fifteen shillings' cost can yield only fifteen 
shillings' value, and that by a mere change in the distribution of 
the items of expenditure, a cost of twenty-seven shillings will 
yield a value of thirty shillings, is a complete failure, and conse- 
quently his theory of surplus value, and that of the " exploitation 
of the laborer," entirely breaks down. 

Section III. — The Cause of Marx's Error. 

The cardinal mistake in the argument of Marx arises from a 
too literal acceptance of the Ricardian theory that the value of 

^ ' ' The value of a commodity therefore varies directly as the quantity and in- 
versely as the productiveness of the labor incorporated in it." — " Capital," p. 7. 
' ' It (machinery) never adds more value than it loses on an average by wear and 
tear." — Ibid.^ p. 383. " The less labor it (machinery) contains the less value it 
imparts to the product. The less value it gives up so much the more productive 
it is, and so much the more its services approximate to those of natural forces." 
—liid.^ p. 386. 



CAUSE OF MARX'S ERROR. 257 

commodities is determined by the quantity of labor expended in 
their production. If he had been more of an economist and less 
of a revolutionist, he might have seen that this is one of the many 
instances where Ricardo came very near the truth but just missed 
it. The error of this postulate, as already pointed out,^ consists 
in making the value of the product depend upon the quantity 
instead of the cost of the labor power expended in its production. 

In considering the relation of the cost of labor to the value of 
the product, it should always be remembered that it is the total 
cost of the aggregate labor consumed in a given unit of product 
which affects its value, and not necessarily the cost per unit of 
labor. If the cost of labor per unit of time is diminished^ the quantity 
of labor consumed in a unit of product may be increased without in- 
creasing its value. And conversely, if the cost of a unit of labor 
is increased^ the quantity of labor consumed in a unit of product may 
be diminished without reducing its value. 

Thus it is that the value of a commodity varies with a variation 
in the quantity of labor devoted to its production only when the 
cost of the labor per unit of time remains the same. If Marx, 
instead of unqualifiedly accepting Ricardo's crude formula, had 
recognized this fact, he would have seen that when the laborer's 
working day was doubled without any change in his daily wages, 
although the quantity of labor expended was double, the total 
cost of labor power was the same ; hence, as double the amount 
was produced, the cost of labor power per unit of product was 
reduced one-half. It would then have been clear to him that the 
value of the twenty pounds of yarn could have been increased 
only three shillings by the twelve hours' labor, because three 
shillings was all that the twelve hours' labor cost. The product 
of the three shillings' worth of labor being twenty instead of ten 
pounds of yarn, the labor cost of each pound was of course fifty 
per cent, less, and therefore the value of the twenty pounds of 
yarn was only twenty-seven shillings instead of thirty shillings, 
as Marx assumed. 

The first condition of scientific law is that it must explain 
existing and constantly recurring phenomena. This is precisely 
what Marx and the EngHsh economists have not attempted to 
make their theory of profit do. They have assumed that from 
the general principle of self-interest in human nature no one will 

^ Part II., chapter v., section ii. 



258 MISTAKEN ASSUMPTIONS. 

use capital in production except he can obtain a profit. From 
this they concluded that all capitalists must of necessity obtain 
profit, and that the rate of profit tends to approximate uniformity 
in all industries. Since all capitalists are assumed to be governed 
by the same principle of self-interest, each one is regarded simply 
as a duplicate of the rest, instead of being treated as one of the 
ever varying units of a highly complex aggregate. Consequently, 
in treating the question of profit, while assuming free compe- 
tition, Marx deals only with a single producer, or if with more 
than one, he assumes that they all produce at the same cost per 
unit and have substantially the same rate of profit. 

This is precisely what does not occur. NeitKer uniform cost 
of production nor a uniform rate of profit exists in any civilized 
country, nor have they ever existed under the capitalistic system 
of production. On the contrary, the characteristic feature of 
that productive system is free competition among numerous pro- 
ducers, who produce at an ever increasing variety of costs per 
unit of product and an equally varying rate of profit. It is pre- 
cisely because profits are not uniform, but that in the same 
industry some can secure large profits while others can obtain 
none, that the profit system is so fiercely assailed as unjust. The 
chief charge against trusts and syndicates is that they undersell 
the smaller producers, and through obtaining a monopoly secure 
to themselves large profits. It is not surprising that Marx, like 
the English economists, should fail to find equitable profit when 
he ignored the only conditions under which profit always exists. 

Section IV. — How Eco^io^nic Profit is Equitably Evolved, 

If profit is necessarily inequitable, it is uneconomic ; if it can- 
not be obtained without injustice, it should be prohibited. Profit 
has already been defined as the undivided surplus remaining 
after all costs are paid. It has also been explained that the law 
of surplus is a necessary corollary of the law of price, which also 
has been presented in a previous chapter.' 

The movement of both price and surplus, according to this 
law, was shown in diagram 2 (p. 206), which for convenience is 
here reproduced and may be assumed to represent six manu- 
facturers of cotton cloth of the same quality. 
^ Part III., chapter iv. 



EVOLUTION OF PROFIT. 



259 



NO. 4. 



Profit. 



Price. 



Actual Cost. 



Cost Saved 
BY Capital. 



t c. 

I c. 



4 c. 

4 c. 

4 c. 

4 c. 

4 c. 

4 c. 



Minimum cost 



3 c. 
3tc. 



Source 
31^1 Profits. 



3f c. 



3fc. 



Maximum cost a 



It will be seen that A, who represents maximum cost, produces 
his cloth at four cents a yard and sells it at four cents. He occu- 
pies the same position that Marx's capitalist did — he sells at cost 
and has no profit. If the case of A was considered alone, or if 
he was an exact duplicate of all other manufacturers, then the 
result would be exactly what Marx found, and there could be no 
profit without either raising the price to the consumer or reducing 
wages. But it is precisely because A is not a duplicate of the 
others that to consider him alone leads to an erroneous con- 
clusion. It is only because the others produce under conditions 
different from A, while being able to sell at the same price, that 
they obtain any profit, which is what everywhere takes place. 

It will be observed that the only point of uniformity among the 
six manufacturers is the selling price. They all obtain the same 
price for their cloth, but each one has a different amount of 
profit, because he produces at a different rate of cost. Just to 
the extent that the amount in each case on the cost side is 
diminished, does that on the surplus or profit side increase — 
that is to say, directly as the cost line of B, C, D, E, and F 
recedes from that of A on the right does the amount increase in 
the profit column on the left. It will also be observed that the 
increase in the profit column in no way affects the price column. 

Thus it appears, when we study production as it actually occurs, 
that profits can arise without injustice. In the case of the six 
competing manufacturers, who correctly represent modern in- 
dustry under free competition, all the conditions of economics 
and ethics are fulfilled ; equivalent is given for equivalent, price 
equals cost, and profit is produced. If it is asked why B, C, D, 



260 EQUITY OF ECONOMIC PROFIT. 

E, and F should receive the same price for their cloth as A, when 
they can make it at a less cost, the answer is that they furnish the 
same equivalent for what they receive that he furnishes. To give 
A more than four cents a yard would be both inequitable and 
uneconomic ; inequitable because it would be giving more than 
an equivalent for the cloth ; uneconomic because it would be 
adding a burden to the consumer in order to give a premium to 
the most incompetent producer, thereby destroying the incentive 
for developing improved methods of production. All that the 
consumer can in equity demand or by economic law exact from 
the producer is that he shall obtain the full equivalent of his four 
cents. This he obtains from B and from all the others as com- 
pletely as from A. The only difference between the producers is 
that, from causes peculiar to themselves, some of them make na- 
ture do more than others. Nature does one fourth more for F 
than for A, but they all do precisely the same for the consumer ; 
they all give him a yard of exactly the same quality of cloth for 
four cents. The consumer has no claims upon B which A is not 
equally bound to satisfy. And if B should consent to sell at 
three and four fifths cents a yard, nobody would continue to buy 
from A at four cents. There is no principle in equity which de- 
mands that B or C or D or E or F shall give more cloth for four 
cents than A gives ; nor is there any law in economics by which 
they can be made to do so. 

Moreover, profit thus evolved is not merely economic and 
equitable, but it is actually beneficial to the community. So far 
from being obtained by exploiting the laborer, it is the premium 
offered by economic law for the invention of superior methods of 
production, by the use of which the community, including the 
laborer, obtains a larger amount of wealth for the same service. 
It is the community that ultimately reaps the greatest advantage, 
for the great profits of F constitute an incentive to increase pro- 
duction, and the only way F can insure the sale of his larger 
product is by reducing the price so as to undersell his com- 
petitors. Just as frequently as this occurs, the profit of the last 
profit-man is handed over to the community in lower prices. 
This is what is constantly taking place as fast as the concentra- 
tion of capital is increased and improved methods of production 
are employed.. 



SURPLUS WAGES, 26 1 

It is clear, therefore, that the profits of B, C, D, E, and F are 
not obtained at the expense of equity. They pay the same Vv^ages 
and fulfil all the other economic requirements just as completely 
as does A, or as do the shoemaker and the farmer, with whom they 
exchange their product. Just as fast as the dearest man is under- 
sold these profits are passed to the public ; and the only means 
by which the consequent diminution of profits can be checked is 
by capital making another draught upon nature. Thus capital, 
through the incentive of profit, becomes the constant means of 
exploiting nature for the benefit of society — instead of exploiting 
the laborer and consumer for the benefit of the capitalist, as Marx 
and his disciples so persistently claim. 

If we pass to the sphere of labor we find that the Ricardian- 
Marx theory is as inadequate to explain the facts there as it is in 
the case of commodities. Marx admits that the value of labor 
power is determined by the cost of its production, just as is the 
value of commodities. According to this hypothesis, the value 
of every pound of yarn must be equal to the sum ol values that 
enter into its production, the value of every day's labor must be 
equal to the sum of values that enters into its production — /.<?., 
the wages of every laborer must be equal to the cost of his own 
living. Now we know that in every industry the wages of the 
same class of laborers tend to a uniformity, while the cost of 
living of the individual laborers varies greatly. Foi example, we 
know that in New York City painters, carpenters, bricklayers, 
cigarmakers, tailors, etc., who work on the same grade of work 
or in the same shop get the same wages, but individually the cost 
of their living varies in some cases several dollars a week. On 
the Marxian hypothesis, that the capitalist who sells his yarn for 
more than it costs him exploits some of the factors of production, 
the laborer who obtains more for his labor than it cost him must 
also have exploited some other factor. Marx would object to 
charging the laborer with robbery ; his purpose is to prove the 
other man the thief. Yet, if it is a law in economics that the 
possession of a surplus proves exploitation, then a surplus in the 
hands of the laborer who has sold his labor power for more than 
it cost him is as conclusive evidence of exploitation as is a sur- 
plus in the hands of the capitalist who has sold his commodity 
for more than it cost him. Scientific law does not discriminate 



262 PRODUCT PROFIT AND WAGES, 

between Individuals ; there is no operation of natural law under 
which the laborer is an honest man and the capitalist a thief, 
when both are doing the same thing.-- A theory which thus puts 
vice at a premium and virtue at a discount by showing that 
none but thieves succeed and that the only reward for honesty is 
failure and poverty, should only need stating to be rejected. 

Section V. — The Ratio of Profit to Product and to Wages. 

One of the most prevalent assumptions regarding profit is, that 
it takes an inordinately large proportion of the product. The 
point upon v/hich Marx lays exceptional stress is that profit prac- 
tically equals wages. Although few careful writers would now 
venture to contend that wages are actually diminishing, "the idea 
of Rodbertus, that the laborer's share of the product diminishes 
as his productiveness increases, is very commonly accepted. 
How much of the product goes to profit and the ratio of profit to 
wages are mainly questions of fact ; it is therefore to facts 
that we must turn for any satisfactory explanation of the sub- 
ject. 

If the law of prices and wages presented in these pages is 
sound, and its corollary of the law of surplus (rent, interest, and 
profit) is correct, we may expect, under modern productive con- 
ditions, to find three important facts : (i) that real wages {wealth 
obtainable for a days service) tend to increase both actually and rela- 
tively to the quantity of consumable wealth produced j (2) that, while 
the surplus or profit increases in its actual amount, it diminishes 
relatively to the aggregate net product ; that is to say, profit absorbs 
a dinmiishing proportio7i of the consumable wealth produced j (3) 
that the ratio of wages to profits tends to iticrease, and that both the 
actual amount of consumable wealth and the relative proportion of 
the net product which goes to labor are greater than the amount ivhich 
goes to capital, and that this tendency increases as the concentration of 
capital and the use of improved methods advance. 

I, Is the proposition that real wages tend to increase both 
actually and relatively to the quantity of consumable wealth pro- 
duced, sustained by the facts ? Fortunately, the industrial history 
of the present century affords ample data for a conclusive answer 
to this question. Let us take the cotton industry, which by this 



THE COTTON INDUSTRY, 263 

time the reader has become quite familiar with. Moreover, this 
industry affords an excellent illustration of the principles under 
consideration, because it is a very extensive industry. It is also 
completely representative of the factory system, and as such has 
been in existence longer than almost any other industry. At the 
commencement of the present century the weaver could only buy 
ten yards of cloth with a week's wages. To-day (1890) he can 
obtain a hundred and fifty yards of his own product for a week's 
wages, while working about thirty hours less per week. That is 
to say, through a rise in his wages and a fall in the price of the 
product, he is able to obtain fifteen times as much of his own 
product for a day's work in 1890 as he could obtain in 1800. 
The factory period in this country really dates from about 1830. 
From that time to 1880 the investment of capital, the number of 
establishments, the amount and price of product, and the wages 
paid in that industry were as follows : 

1830. 1880. 

Number of establishments. 801 756 

Aggregate capital invested $40,612,984 $208,280,346 

Number of lbs. cloth produced 59,514,926 607,264,241 

" persons employed 62,208 172,544 

" spindles " 1,246,703 10,653,435 

Amount of capital to establish. $50,702 $275,503 

Ratio of lbs. produced to capital 1.4 to $1.00 2.4 to $1.00 

" capital to persons employed $652.85 to i $1,207.17 to i 

" spindles to persons " 22 to r 62 to i 

" capital to spindles " $32.58 to i $19-55 to i 

" lbs. produced to persons employed 950,7 to i 3,519-5 to i 

" " " "spindles 47. 6 to i. 57.0 to i 

Annual consumption of lbs. of qotton cloth per capita. . .5.90 I3.81 

Price of cotton cloth per yard 17 cents 7 cents 

Operative's wages per week $2.55 $5-40 

It will be seen that in the 756 large establishments in 1880 in 
which the aggregate capital invested was five times as great as 
that in the 801 small establishments in 1830, the capital invested 
per spindk was one third less, the number of spindles operated 
by each laborer nearly three times as large, the product per 
spindle one fourth greater, the product per dollar invested twice 
as large, the price of the cotton cloth nearly sixty per cent, less, 
the consumption per capita of the population over one hundred 
per cent, greater, and wages more than double. 



264 PURCHASING POWER OF WAGES. 

If we take the New England States, which comprise the leading 
cotton-manufacturing district in the country, and also that where 
the greatest concentration of capital and machinery in this 
industry has taken place, the results in this direction are still 
more striking. According to the statistics on wages and prices 
from 1752, gathered by the Massachusetts Labor Bureau,^ in 
1 83 1 the ratio of spindles to operatives was 24jf q- to i. In 1880 
they were yiif-o to i. And the ratio of pounds of product to 
operatives employed in 1831 was 1,484 to i, and in 1880 it 
was %^Z2> to I. That is to say, during fifty years the ratio of 
spindles to operatives increased 184 per cent., and the ratio of 
product to operatives 145 per cent. During the same period 
the aggregate wages of men, women, and children rose 115 per 
cent., and the hours of labor were reduced 12 percent., while 
the price of calico print fell from 17 to 7 '^ cents a yard. Thus, 
while the wages in this industry rose 115 per cent., the purchasing 
power of those wages in the finished product increased 241 
per cent. ; that is to say, through a rise of wages and fall in 
prices accompanying the concentration of capital and use of 
improved methods, the laborer was enabled to obtain over five 
times as much of his own product for a day's labor in 1880 as he 
did in 1830 — the increase is still greater now (1890). 

If we consider the matter from the standpoint of value 
instead of quantity of product, a similar result is apparent. 
In 1850^ the value of the product per operative in New Eng- 
land was $707 ; in 1880 it was $1,139 per operative, an increase 
of 6iy%^o- per cent. The wages in this industry for 1850 for New 
England are not obtainable, but if we assume that the proportion 
of the 115 per cent, increase from 1830 to 1880 was as great after 
as before 1850, a perfectly safe assumption, the rise in wages 
from 1850 to 18S0 would be 69 per cent. Measured in money, 
therefore, the value of labor (wages) of cotton operatives rose 8 
per cent, more than the value of their product. If we extend this 
generalization to the whole United States the result is very 
similar. The value of product per operative in the cotton 
industry in 1850 was $709, and in 1880 it was $1,112, being an 

1 Report for 1885, pp. 185-189. 

''^ Ibid., p. 455. 

^ I have taken 1850 because the value for 1830 is not obtainable. 



m MR, GIFFEN ON WAGES AND PRODUCT. 26$ 

increase of 561^0"* P^r cent,, or 12 per cent, less than the rise of 
wages. Therefore, whether we view the question from the 
standpoint of quantity of wealth, purchasing power of wages, or 
the ratio of wages to product, it is equally clear that wages have 
increased both actually and relatively to the quantity of con- 
sumable wealth produced, as capital has been concentrated and 
as improved methods of production have been employed. 

Notwithstanding this rise of wages and fall of prices, it is 
insisted that the laborer is despoiled of a large part of the wealth 
he produces. As evidence of this we are pointed to the fact that 
in many industries the product per laborer has increased more 
than a thousand per cent, during the last fifty years, while their 
wages have not much more than doubled. This claim has been 
virtually conceded by Mr, Giffen, President of the British Statis- 
tical Society. He says : " On this head it may be admitted, to 
begin with, that there is apparent foundation for some of the 
complaints* Workmen in particular employments do not get a 
reward at all in proportion to the increase of production in those 
employments. The illustration of a cotton-mill is familiar. A 
single attendant on a number of machines will 'produce' as 
much in an hour as formerly in a year or two, but his wages are 
only double — or perhaps not quite double — what they were when 
the production was so much less.^ . . . But the increased severity 
of toil, without proportionate remuneration, might be admitted 
in those special employments without altering the fact that 
remuneration has increased generally. What seems to have 
happened in these cases is that the development of society 
imposes a heavy burden on a special class." ^ While he tries to 
break the force of this complaint by showing that remuneration 
has increased generally, he practically admits the injustice, and 
treats it as an inherent element in the present industrial constitu- 
tion of society. This is all that socialistic reconstructionists 
claim ; it is because they believe that equity is impossible under 
the present industrial system that they demand its abolition. 
Nor can their claim be reasonably resisted unless these phe- 
nomena can be explained without assuming either that society 

' See U. S. Census (1880J, volume on Manufactures, pp. 541-547. 
- " Gross and Net Gain of Rising Wages," Contemporary Review, December, 
1889, p. 835. ^ Ibid., ^.'61%. 



266 MR, GIFFEN'S ERROR, 

has developed in the wrong direction or that natural law is 
inherently unjust. 

Here is another instance of the error of treating wages as a 
share in the division of the product, instead of an item in the cost 
of production. If this view were correct, and wages in each 
industry should rise directly as the product per laborer increases, 
as Mr. Giffen's argument implies, the result, instead of being more 
equitable, would be unjust to the laborers and more inimical to 
society. It would be unjust to the laborers because it would 
give all the increased product resulting from improved machinery 
to the particular laborers who happen to use the improved 
implements, thus depriving the laborers in non-machine-using 
industries of any advantage arising from superior methods of 
production. Upon what principle of equity should a weaver 
or shoemaker who happens, without any virtue on his part, to use 
improved instruments, receive fifty or a hundred times as much 
wages as the bricklayer, painter, compositor, and other hand- 
workers whose industries do not admit of the use of steam-driven 
machinery ? Manifestly any industrial system which would in- 
crease the wages of the factory-worker fifty or a hundred-fold, 
while it would only advance those of hand-workers ten or twenty 
per cent., simply because, in the nature of the occupations, the 
former could and the latter could not use labor-saving machinery, 
would be the very embodiment of injustice. 

It would be inimical to society, because it would make any 
general reduction in the price of commodities impossible, as the 
increased wealth would all go to the particular laborer who used 
improved machinery, thus depriving the community in general of 
any participation in the advantages of industrial development. 
It is hardly necessary to say that the use of steam-driven 
machinery is no more due to the particular operatives who use it 
than it is to the millions of compositors, bricklayers, farmers, and 
other laborers who do not use them. In the first place, it is the 
consumption not of the machine workers merely, but of the whole 
community that supplies the market which makes the use of the 
factory methods possible. And in the second place, it is the 
inventive genius developed by an advancing civilization, to- 
gether with the capital invested in the production of machinery 
to supply the need thus created, that furnishes the increased 



DISTRIBUTION OF BENEFITS. 267 

product. Clearly therefore, if only the wages of those laborers 
were increased who used the improved instruments the market 
for the machine-made products would be too small to enable 
factory methods to be profitably employed. Thus a system which 
would give all the increased product resulting from improved 
instruments to the particular laborers who use those instruments 
would not only be highly unjust, but would defeat itself and 
arrest the industrial progress of society. 

If we examine the case of machine-using and non-machine 
using laborers in the light of the law of wages and prices 
heretofore presented, it will be apparent that the mere fact that 
the laborer produces more, has practically nothing to do with 
what he shall receive, because it has nothing to do with the cost 
of his living. The amount he produces by a day's work depends 
far more upon the kind of tools he uses than upon his personal 
quality. A twelve-year-old child in a New England factory can 
spin more yarn than a hundred of the most expert spinners that 
i ever lived could produce with a spinning v/heel. It is the price 
of the product, and not the price of the labor, that is determined 
by the quantity the laborer produces in a day. The cost of his 
living being the same if he produces twice as much, the cost of 
production and hence the price will be proportionately reduced. 
Thus any improvement of productive instruments which enables 
the laborer to produce more, his cost of living being the same, 
will show itself not in a rise of his wages, but in a fall of the' 
price of the commodities he produces. 

On the other hand, the price of hand-made commodities rises 
in proportion as the laborers' wages increase. It thus appears 
that wages are determined by conditions which affect the charac- 
ter and cost of the laborer, and not by those which influence the 
quantity and cost of the product. When the standard and cost 
of living of the compositor, bricklayer, painter, etc., increase, the 
community has to pay more for the products of their labor, 
because there is not much improvement in the tools they use ; 
whereas the product of the factory worker is so much increased 
that, although his wages rise as much as those of other laborers, 
(the cost of production is greatly diminished. That is why the 
price of all hand-made products tends to rise while that of 
machine or factory-made products constantly tends to fall. It is 



268 EQUITY OF ECONOMIC LA W. 

because the wages of the hand-workers have increased in a 
greater proportion than their product that those of machine 
workers have increased less proportionately to their product. 
By this means the disadvantage of inferior and the advantage of 
superior instruments is distributed uniformly to each person in 
the community to the extent that he is a consumer. Thus the 
two prime movements of industrial progress, the rise of wages and 
the fall of prices, benefit laborers in all occupations and condi- 
tions directly as their wealth-consuming capacity increases and; 
social character rises. 

It will be observed that, from this point of view, the case of the 
workman to whom Mr. Giffen referred as not getting " a reward 
at all in proportion to the increase of production," appears 
entirely different. What to him appeared to be a necessary in- 
justice is in reality the evidence of the supreme equity of 
economic law. The increased product being mainly due to the 
use of capital and improved tools, which has been made possible 
through the use of increased consumption and higher social life 
of the general community, it is to the community in general, and 
not to particular laborers who happen to use those tools, that the 
increased product in equity should go, and by economic law does 
go. The important fact that cannot be too much emphasized 
here is, that wages are paid for the economic cost, and hefice for 
the social quality of the laborer. It is therefore what the laborer 
is rather than what he does that determines his wages, and this is 
true without regard to the nature of his occupation or the quality 
of his tools. 

2. This brings us to the second proposition, that profits tend 
to absorb a diminishing proportion of the consumable wealth 
produced. In view of what has already been said, a discussion 
of this proposition might be properly deemed unnecessary. And 
were it not that one of our most trusted statistical authorities has 
apparently affirmed the opposite, I should so regard it. In the 
report of the Massachusetts Bureau of Statistics of Labor for 
1885 the data for nine industries are given, which show that the 
percentage of the net product paid as wages fell from 59x^0 per 
cent, in 1850 to 48-5% per cent, in 1880, and, after commenting 
upon the peculiarities of each industry, the report (p. 191) says : 

" An examination of these two tables would, we think, lead to 



r 



RATIO OF PROFIT TO PRODUCT. 269 



the conclusion that, although in every case money wages have 
considerably increased, yet in certain industries in which the 
principles of the factory system {i.e.^ the subdivision of labor, co- 
ordination of processes, and the application of a series of mutually 
dependent and practically automatic machines) have been most 
effective, such, for instance, as in the cotton and woollen indus- 
tries, the relative share of net product gained by the workmen 
tends to decrease. That is to say, in these industries perfection 
of machines and processes constantly tend to create a larger 
product with less capital, and the ratio of increase in productive 
capacity tends to outrun the ratio of increase in wages, so that 
of this larger product labor obtains a less relative share." 

They then take from the United States Census the same data 
for all industries in the country, and find that 5 1 per cent, of this 
net product was paid in wages in 1850 and only 48jV per cent, in 
1880, and say : " It appears that when the field is broadened so 
as to include the entire manufacturing industries of the country, 
(labor's share of the net product has declined from 51 per cent. 
to 48yV per cent." 

In view of such emphatic statements apparently sustained by 
^facts from such a reliable source, it can hardly be a matter of sur- 
; prise that it is generally believed that wages obtain a constantly 
[diminishing and profit gains an increasing proportion of the 
wealth produced. It is important, therefore, even at the risk of 
being a little tedious, to examine the process by which this con- 
clusion is reached. Nor will this be very difficult, since both the 
data and the method of treatment are amply stated. The method 
of procedure is to divide the. product into gross and net value, 
the former being the value of the aggregate product, and the 
latter that of the product less the cost of the raw material. This 
is regarded as representing the net value created by the joint 
operation of the labor and capital employed in the enterprise.^ 
[f a diminishing proportion of this net product is paid as wages, 
t is concluded that an increasing proportion of it must go to 

* "Net product, or value of product remaining after deducting value of raw 
iterials of manufacture, represents the direct result of the productive forces 
n the given industry ; or, in other words, it represents the value created over 
,nd above the value of raw materials by the effective operation of labor and 
apital united." — Report of Bureau of Statistics of Labor, p. 190. 



I 



270 DEFECTIVE METHODS. 

profits/ This method of treating the subject is defective in two 
respects : (i) in regarding the ratio of the total wages to the 
net product (product less raw material) as indicating the economic 
condition of the laborer ; (2) in assuming that a diminution in 
the ratio of the total wages to this net product necessarily implies 
a proportional increase of profit. 

(i) That it is a mistake to treat the ratio of the aggregate 
wages to the value of product as indicating the economic condi- 
tion of the laborer, is shown by the fact that this ratio may 
increase and the laborer grow poorer, and it may diminish while 
the laborer's condition improves. Take, for example, the hand- 
loom weaver and the factory laborer. After deducting the raw 
material, nearly all the value of the product of the hand-loom 
weaver went to wages ; while, according to the bureau's figures, 
only about 48 per cent, of the product now goes to wages, yet no 
one would pretend that the hand-loom weavers were in a better 
economic condition than are the factory operatives to-day. 
Whether the amount paid for labor is one million or one thou- 
sand millions of dollars in no way affects the laborer's condition, 
except as it gives a larger amount to each laborer. The same is 
true of the proportion. Whether the 80 or 90 per cent, of the 
product received by the hand-weaver gave him more actually or 
relatively to the product than 50 per cent, will to-day, depends 
entirely upon whether it is paid to a relatively larger or smaller 
number of laborers. If the aggregate amount paid in wages 
relatively to the product were doubled, and either the number of 
laborers to whom it was paid or the time expended in producing 
it with the same laborers was more than doubled, instead of indi- 
cating an improvement in the laborer's condition, it would show 
a deterioration. 

Suppose for example, that under hand labor, 80 cents out of 
each dollar's worth of product go to labor, and are paid to 20 
laborers, the ratio of wages per laborer to the value of the 
product will be as 4 cents to the dollar ; whereas, if, under the 
factory system, only 50 cents out of every dollar's worth of 
product goes to labor, if it is all paid to five laborers, the ratio 
of wages per laborer to the value of the product would be as 10 
cents to the dollar. Thus every laborer would receive relatively 

^ Ibid., p. go. 



MISLEADING DEDUCTIONS. 2/1 

to the product created two and a half times as much with the 50 
per cent, under factory production as with the 80 per cent, under 
hand labor. Now this is precisely what has occurred in the 
development of factory methods of production. Clearly there- 
fore, it is not the proportion between the aggregate wages and 
the product, but the proportion between the amount paid to each 
laborer and the product that indicates his economic condition. 
In other words, it is the rate and not the aggregate amount of 
wages that is the true basis of comparison, because it is the rate 
of wages only that affects the laborer's economic status, either 
actually or relatively. 

(2) The assumption that a diminution in the ratio of aggre- 
gate wages to the so-called net product necessarily implies a pro- 
portional increase of profits is also a mistake. The fact that 51 
per cent, of the net product was paid in wages in 1850 and only 
48^^ was so paid in 1880, does not prove that the percentage of 
the product going to profit has increased ; on the contrary, this 
might occur and profit be greatly reduced or annihilated alto- 
gether. All this fact reveals is that in 1880 the total amount 
paid in wages represented 2-f-^ per cent, less of the value of the 
product, after deducting value of raw material, than it did in 
1850; but this does not show that more of the remaining 51 y^o- 
per cent, of the product went to profit. Until that remaining 
portion is accounted for, there can be no more warrant for saying 
that it went to profit than that it went to the moon. The only 
condition under which the amount of one item can be properly 
inferred from that of another is when the two represent the whole, 
or when the amount they do not represent is a known fixed 
quantity. Since all the product, less raw material, is not divided 
between wages and profit, the inference that the ratio of profit to 
net product increases because that of wages is diminished can 
only be valid when all the other items are definitely ascertained. 
That this has not been done in the present instance is shown by 
the following statement: "The value of net product forms, as 
we have said, a fund divisible into interest on capital, Interest on 
loans, insurance, freights, rents, commissions, wages, and profits. 
!* Now if the relative share paid in labor in the form of wages is 
I decreased, it is, of course, obvious that the share remaining for 
the other purposes mentioned is increased. If capital is also 



2/2 OMITTED DATA, 

relatively decreased, then it is fair to suppose that the share 
chargeable to interest is also diminished. It is well known that 
the relative cost of freights and insurance has decreased." ^ 

It will be observed that the above not only fails to definitely 
explain the relative amount of the other items in the cost of pro- 
duction and thereby obtain the proportion going to profit, but it 
omits some items altogether. In the first place, it only accounts 
for a portion of the amount which is paid for service, no account \ 
being taken of salaries of managers and other overseers, and 
agents, which are a part of the payment to labor, and are included 
in the cost of production as much as the day- wages of the laborers 
in the shop. In the next place it omits entirely the depreciation 
of capital, which is also a necessary item in the cost of produc- 
tion. The items thus unaccounted for necessarily go to swell the 
undivided surplus which is put down as profit. By this means it 
may be made to appear that a large profit exists, when in truth 
there has been a dead loss, and when a profit does actually exist 
this method of investigation will invariably make it appear very 
much larger, sometimes more than double what it really is.' Both 
these items of cost affect the result in two ways. In the first 
place, other things being the same, they both reduce the undivided 
surplus going to profit to the full extent of their amount. In the 
next place, they both absorb an increasing proportion of the 
net product in proportion as factory methods of production are 
increased. 

It is impossible to state the exact proportion of the net product 
paid in salaries in the different periods, because that item has 
been entirely omitted by all industrial statistics until the Massa- 
chusetts Census for 1885. According to this report, the total 
amount paid in salaries in that State in 1885 was $10,846,367, 
which was equal to i^-^-^ per cent, of the value of the net product. 
In order correctly to understand this data, however, it must be 
observed that this amount was all paid by less than 10 per cent, of 
the establishments. That is to say, out of the 23,431 manufac- 
turing establishments only 2,144 P^id salaries, and of these 949 
were corporations. The 949 corporations own an aggregate capi- 
tal of $300,649,758, or an average of $316,806 each, while the 

1 Report of the Bureau of Statistics of Labor, Mass. (1885), pp. 190, 191. 
' A case of this kind appears in the 20th vol. of the Census, 1880, pp. ill, II2. 



EVOLUTION OF SALARIES. 273 

22,482 private concerns have an aggregate capital of only $199,- 
944,619, or an average of $8,893. In other words, the 949 cor- 
porations, which only represent 4i-|^ per cent, of the establish- 
ments, own 6oy|-o- per cent, of the capital, use 36yVg- per cent, of 
raw material, produce 35tA P^r cent, of the finished product, 
,employ ^o-f-f-^ per cent, of the laborers, and pay 36yV\ per cent. 
of the total wages. Thus it is quite clear that the salaries are 
nearly all paid by the large concerns, over 90 per cent, of the 
smaller ones not paying any salaries at all. 

In 1850 the average amount of capital invested per manufac- 
turing establishment for the whole country was $4,334, or only 
about half the amount that is invested in the average establish- 
ments in Massachusetts to-day which pay no salaries. In 1880 
the capital invested in the average establishment was $10,991. 
Thus, while it is impossible from these data to ascertain the exact 
ratio of increase, it is obvious that the amount paid in salaries 
becomes an increasing proportion as the concentration of capital 
into large establishments increases. Since the 3yVo" P^^ cent, of 
the net product paid in salaries in Massachusetts (which may be 
taken as representative of the whole country, though it is prob- 
ably a fraction higher) is practically all paid by concerns having 
a capital of $250,000 or upwards, it is quite safe to assume that 
not more than one fourth as much was paid in 1850, when the 
average amount of capital per establishment was only $4,334. To 
estimate this item as representing one per cent, of the net product 
in 1850, will therefore be quite liberal. Of the remaining 2^^ 
per cent, which this item has increased since 1850, \\ per cent, 
may safely be assigned to the period from 1850 to 1880, which 
alone accounts for more than one half of the apparent relative 
decrease in wages. 

The other omitted item, the depreciation of capital, affects the 
result in a still greater degree. This also has hitherto been 
entirely overlooked in all our industrial statistics, but taking 
twenty corporations together in four different industries for eight 
years successively, I find the general depreciation of plant, 
machinery, buildings, etc., together with transient repairs, equals 
iabout six per cent, on the capital invested. Nor does this repre- 
sent all the depreciation of capital. Every improvement in 

machinery which makes a considerable saving in the cost of 

18 



274 DEPRECIATION OF CAPITAL. 

production, and reduces the selling price of the commodity, 
throws out of use a large amount of machinery that was previ- 
ously producing under conditions which barely repaid the cost. 
It is a common thing for millions of dollars' worth of capital to 
be almost annihilated at a single stroke in this way. In the iron 
industry it is a frequent experience that the machinery of whole 
factories, which, so far as its normal productive capacity is con- 
cerned, is in excellent condition, is reduced to the value of old | 
iron by the introduction of superior machinery in a competing \ 
factory. The percentage of depreciation from this cause increases 
just in proportion as new methods of production are introduced. 
While there are no accurate statistics of this kind of depreciation, 
it may safely be assumed to equal one sixth of the normal i 
depreciation, making the depreciation of capital from all sources 
fully 7 per cent. Since the ratio of capital invested to the value 
of the net product in 1850 was as $1.15 to $1, the depreciation i 
of capital would represent 8 per cent, of the net product. In 
1880 the ratio of capital invested to the value of the net product 
had reached .41 to $1. Consequently, the depreciation repre- 
sented 9tVo" P^r cent, of the net product, an increase of lyW P^'^ 
cent. Thus, on a very moderate estimate, the relative increase 
of the two items omitted in the Census returns more than offsets 
the seeming proportional decrease in wages. Consequently, 
assuming other items of cost to have remained the same, instead 
of wages having decreased 2y%- per cent, relatively to the net 
product from 1850 to 1880, they have actually increased jVo" of 
I per cent. 

If we take the data down to 1885, which the ample statistics 
for Massachusetts now enable us to do, the evidence that an 
increasing percentage of the net product goes for service becomes 
more conclusive. According to these, in 23,431 establish- 
ments, with a capital of $500,594,377, producing $574,634,269 
worth of product, the amount paid in wages equalled about 
S^tVo P^r cent, of the value of the product, less the value of raw 
material. The ratio of capital invested per dollar of net product 
was $1-75 to $1. The depreciation of capital represented i2yVV 
per cent, and salaries 3tVo P^^ cent. Taking the period 
from 1850 to 1885, and putting salaries with wages — where they 
properly belong, for they are the payment for service precisely 



RELATIVE DECREASE OE PROFIT. 



2/5 



the same as wages, the only difference being that one is 
estimated by the year and the other by the day or week, — the case 
stands as follows : 





Per cent, of net product paid 
for service. 


Ratio of capital to 

%\ net product. 


Per cent, of 

depreciation in 

net product. 




Wages. 


Salaries. 


Total. 


iSt;© 


51. 
48.1 

51-7 


I. 

2.5 
3.8 


52. 
50.6 

55.5 


$1.15 to $1 
$1.41 to $1 
$1.75 to$l 


8. 


1880 

i88t? 


9.8 
12.2 







Since the whole amount taken in depreciation is consumed in 
maintaining the working efficiency of the plant, it not only does 
not go to the capitalist, but it reduces the amount of net product 
divisible among all classes. Thus it will be seen that, in 1850, 
after deducting the proportion paid in wages and salaries, 40 per 
cent, remained for all the other costs and profit. After making 
similar deductions in 1880, only 39-1^0- per cent, remained for the 
other items of cost and profit, and in 1885 only Z'^^'^ per cent, 
remained for profits and other costs. It is obvious, therefore, 
that if the proportion of the net product paid in rent, taxes, 
insurance, commissions, freights, etc., remained the same, the 
proportion going to profits must necessarily have decreased, 
though its aggregate amount may have increased. 

A close examination of the facts would undoubtedly show, as 
the bureau suggests, that the relative costs of freights and per- 
haps insurance have slightly diminished. It must be remembered, 
however, that all freight charges are made on the basis of quan- 
tity, as so much per ton. If estimated on the value of the product 
the result would be very different. For example, the product 
per operative in the cotton industry measured in pounds increased 
145 per cent, from 1830 to 1880, but measured in value it only 
increased a little over 60 per cent. Thus a reduction of 50 per 
cent, in the cost of transportation per quantity would not shovr 
any reduction per dollar of value. Assuming that profits in 1850 
were equal to 10 per cent, of the net product, and that the 
proportion of the net product paid for transportation has 
since decreased 2 per cent,, and that paid in taxes, rents, commis- 
sions, etc., has remained the same — though Carroll D. Wright 
thinks they have actually increased, — the aliquot parts of the 



276 



RELATIVE INCREASE OF WAGES. 



net product going to service and profit in 1850 and 1885 would 
be as follows : 





Service. 


Other costs. 


Depreciation. 

8. 
12.2 


Profit. 


Total. 


iSelO 


52. 
55.5 


30 

28 


10. 

4-3 


100 


iSSi^ 


100 









It thus appears that, although the proportion of the net product 
paid for service has only increased about 4 per cent, and that 
paid in wages less than i per cent., the proportion going to profit 
has diminished 5yV P^^ cent. It should also be observed in this 
connection that the value of raw material, which represents 57 
per cent, of the total value of the product, and also that nearly 
all the other costs, representing 28 per cent, of the net product, 
are very largely made up of wages. Indeed, if we take the 
finished product and trace the various items of its costs back to 
the crude raw material, we shall find that its value is nearly all 
finally resolved into the amount paid for service. The reason 
the proportion paid for labor in the last stages of manufacture 
appears to represent so small a percentage of the total value is 
(i) because, in the prior stages of its development, so much of 
the value has been previously paid for in wages ; (2) because, in 
the last stages, the greatest amount of capital per dollar of prod- 
uct is employed, and consequently a greater proportion of the 
product created in that stage goes to depreciation of plant, all of 
which must of necessity be eliminated before any scientific com- 
parison of the proportional shares going to wages and profit in 
any given industry can be made. 

Clearly therefore, in order to ascertain whether or not the 
laborer is obtaining an increasing or a diminishing proportion of 
the consumable wealth produced, we must compare the value of 
what goes to labor, not in the aggregate but per laborer^ with the 
value of the product after deducting the cost of raw material, 
depreciation of plant, and all other fixed costs incident to the 
increased production. From this method of examining the case 
it will appear that, in each given stage of the productive process, 
as the concentration of capital and the use of im roved methods 
of production are employed, the laborer receives a constantly 
increasing proportion of an increasing product. 

3. We now come to the question of the actual ratio of wages to 



DIFFICULTY OF OBTAINING DATA. 2// 

profits in modern industry. It is assumed by socialistic writers, 
as already shown in the case of Marx, that under the present in- 
dustrial system profits are not only increasing actually and rela- 
tively to the product, but that they approximately equal wages/ 
Since this is wholly a question of fact and is one of the chief 
reasons urged for revolutionizing the existing industrial system, 
it may be well to compare this claim with the facts in the case. 
The question of profits and wages is one which cannot always be 
settled by public statistics because they are seldom taken in such 
a way as to furnish the correct data upon both these points. As 
already intimated the service item is nearly always incomplete 
and profits are seldom given. The Massachusetts Labor Bureau, 
which has ever been the best source of reliable industrial data in 
this country, made an extensive investigation of the subject of 
profits and earnings for 1875 "^ and 1880, the result of which was 
published in their report for 1883. The results of this investiga- 
tion, which covered 14,352 establishments in 80 industries, show 
that the ratio of wages ' to profits in 1875 was as 2/0% ^^ i> ^'^^ as 
3toV to I in 1880. 

In 1889 I made extensive investigations on the same points, but 
instead of taking a large number of industries for a given year I 
took a limited number of large industries for a number of years 
together. It will readily be seen that the normal ratio of wages 
to profits will be much more accurately indicated by taking a few 

* " There is left the sum o£ ^2 ^^■^- o*^*. which is the variable capital advanced ; 
and we see that a new value of £3 los. od -^^ £2 H-^"- ^d. has been produced in 
its place. Therefore ^' » ^ "^' °^' ■> giving a rate of surplus value of more than one 
hundred per cent. The laborer employs more than one half of his working day 
in producing the surplus value." — Marx, " Capital," p. 203. " Now, gentle- 
men, if you compare the working time you pay for, you will find that they are 
to one another, as half a day is to half a day ; this gives a rate of one hundred 
per cent., and a very pretty percentage it is." — Ibid., p. 211. " But the fact is 
— and on that we lay stress — that the workers receive only about half of what 
they produce. " — Gronlund, *' Modern Socialism," p. 23. 

^ These are exclusive of Boston. I have omitted Boston because for some 
unexplained reason the net product in Boston fell about 75 per cent. Such a 
change must be the result of some abnormal occurrence perhaps in a few indus- 
tries. Although it would greatly reduce the ratio of profits to wages In 1880, 
rather than use doubtful results, I prefer to exclude the whole of Boston data. 

^ Exclusive of salaries. 



2/8 



RATIO OF PROFITS TO WAGES. 



representative concerns for a considerable number of years to- 
gether, than by a very much larger number of concerns for a sin- 
gle year. For instance, the complete facts for ten large corpora- 
tions for ten years together will much more accurately show the 
normal ratio of wages to profits in that industry than would the 
facts, equally complete, for all the concerns in the country for any 
given date. This investigation shows that the ratio of wages to 
profits in thirteen leading industries for a number of years to- 
gether,^ to be as 4.20 to i. Taking the basis adopted by the 
Massachusetts Bureau for 1880, the relative movement of profit 
and wages from 1850 to 1885 has been as follows : 

ALL MANUFACTURING INDUSTRIES FOR THE UNITED STATES. 





Percent- 












age of raw 


Percent- 


Percent- 








and fixed 


age of 


age of 


Average" 


Ratio of 


Value of aggregate product. 


costs in 


wages in 


profits in 


yearly 


wages to 




total 


total 


total 


wages. 


profits. 




product. 


product. 


product. 






1850 — $1,019,106,616 . . 


67.61 


23.23 


9.16 


$247.37 


2.53*10 I 


i860— 1,885,861,676 . . 


67.92 


20.09 


11.99 


288.94 


1.67 to I 


1870— 4,232,325,442 . . 


71.79 


18.34 


9.87 


376.59 


1.85 to I 


1880— 5,369,579>i9i • • 


76.37 


17.67 


5.96 


346.91 


2.96 to I 


ALL MANUFACTURE 


D INDUSTRIES FOR MASSACHUSETTS.* 


1875—1456,400,458 . . . 


62.57 


27.06 


10.37 


$445.00 


2.60^10 I 


1880— 631,135,284 . . . 


72.79 


21.75 


5-46 


364.00 


3.98 to I 


1885— 674,634,269 . . . 


70.88 


23-45 


5.67 


388.62 


4.13 to I 


1888— 








402.45 1 


THIRTEEN LEADING IND 


USTRIES FOR 8 Y 


EARS TOGETHER TO 1889, 


1889— $112,393,804.98 


67.98 1 25.93 


6.09 4.20 to I 



^ Ten of these were for eight years in succession, two for ten years, and one 
only for four years. 

2 It should be remembered that these figures do not represent the wages 
of men, but the average wages of men, women, and children all taken together. 
Since in manufacturing industries there is generally one worker besides the head 
of the family, and sometimes more, these wages only represent about half the in- 
come of the average family in these industries. 

' This column is exclusive of salaries. 

^ Exclusive of Boston. I have omitted Boston because for some unexplained 
reason profits fell from an aggregate of $27,640,680 in 1875 to $7,162,768 in 
1880. Such a change must be the result of some abnormal occurrence perhaps 
in a few industries. Although it would greatly reduce the ratio of profits to 
wages in 1880, rather than risk doubtful results I prefer to exclude the whole of 
Boston data for 1885. ^ This includes salaries. 



ACTUAL RISE OF WAGES, 2/9 

It will be seen from these facts, which represent the greatest 
body of statistical data ever collected upon the subject/ that the 
industrial tendency during the last thirty years has been steadily 
towards a greater concentration of capital and economy in pro- 
ductive power, resulting in an actual increase in wages both rela- 
tively to the product and per laborer employed, and also a relative 
proportional decrease of profit as compared with wages. 

^ The figures for the United States are taken from the Census of 1880 and 
those for Massachusetts are taken from the industrial census of that State, rep- 
resenting for 1880 14,352 establishments in 80 industries with an aggregate capi- 
tal of $271,056,051 ; for 1885, 23,431 establishments in 83 industries, with an 
aggregate capital of $500,594,377. 



PART IV, 

THE PRINCIPLES OF PRACTICAL STATESMAN- 
SHIP ; OR, APPLIED SOCIAL ECONOMICS. 



CHAPTER I. 

LAISSEZ FAIRE AS A GUIDING PRINCIPLE IN 
PUBLIC POLICY. 

Section I. — A Protest Against Paternalism. 

Although laissez faire has never been the accepted rule of 
public policy in any country, the fact that for more than a 
century it has been taught by leading economists as the guiding 
principle of industrial state-smanship entitles it to prominent con- 
sideration. It should be remembered in the first place that the 
idea of laissez faire as applied to industrial statesmanship does 
not represent an inductively established principle in society ; 
that is to say, it is not a logical conclusion drawn from an ex~ 
tensive study of industrial phenomena. On the contrary it came 
into existence as a watchword to express a protest against the 
high-handed paternalism of the feudal and mercantile systems ; 
and by the force of habitual repetition, sustained by a pardon- 
able bias against a land-owning class, it was subsequently elevated 
to the position of an economic principle. 

During the Middle Ages government was not only essentially 
paternal, but it was exclusively in the hands of the land-owning 
class. The interest class being chiefly local, industrial policy 
was naturally restrictive in character. Accordingly, in the 
earliest stages of manufacture and the growth of the free towns, 
industry was hemmed in by innumerable arbitrary regulations. 
Scarcely any occupation could be engaged in without paying 
tallage or tribute to the baron. And with the growth of the Free 
Cities and the decline of baronial power this privilege of exacting 
tribute for the right to engage in an industry was assumed by the 
guilds, and finally took the form of charters, by which the gov- 

2S3 



284 ORIGIN OF LAISSEZ FAIRE. 

eminent became the exactor of booty. In proportion as manu- 
facture and commerce increased, the evil effects of this policy 
became more and more inimical to public welfare, and made a 
new industrial policy necessary. Nor is it surprising that the 
new policy should be the very opposite of the old one.' The 
remedy for the evil effects of too much government interference 
was naturally sought in a policy of no government interference. 

By the last half of the seventeenth century this anti-paternal 
feeling had become very strong, and was finally voiced by a 
prominent French merchant, who, when asked by Colbert, 
"What can we do to aid you?" promptly answered, ^^ Laissez 
faire " — Let us alone. This expression so completely represented 
the feelings of the mercantile class that it became the watchword 
for a new policy, and by the middle of the next century was made 
the basis of an economic theory by Quesnay and the Physiocrats, 
whose policy was concisely expressed as " Laissez faire et laissez 
passer" — Let us alone and keep the ways free. In the last 
quarter of the eighteenth century this doctrine was revised and 
recast in England by Adam Smith. In many important respects 
the great Scotchman improved upon the doctrines of the French 
Physiocrats, especially in bringing out the economic importance 
of manufacture and commerce. But in view of the fact that the 
public policy of England was still largely determined by the 
landed aristocracy, who were traditionally hostile to the interests 
of the manufacturing and trading classes, Adam Smith naturally 
adhered to the doctrine of no govertiment interference. Since his 
time the idea of laissez faire has been generally presented as 
representing a fundamental principle upon which the industrial 
policy of all nations should be based, any departure from this 
rule being justified only in special emergencies. 

In the next place it should be observed that the doctrine of 
laissez faire has not been verified by subsequent experience ; 
consequently, instead of being more implicitly accepted, its 
economic validity is denied just in proportion as the scientific 
treatment of the subject increases. As an axiom in public policy 
laissez faire is rejected by the inductive economists of the present 
generation with almost as much uniformity as it was accepted by 
the deductive economists of the previous half century. There- 
fore, the claim that the theory of laissez faire represents a 



CHARACTER OF LAISSEZ FA IRE. 285 

universal principle in nature and society, and is entitled to the 
same unquestioning acceptance in economics that is accorded 
to the principle of gravitation in physics, is wholly unwarranted. 

Section II. — Laissez Faire Essentially Unsciejitific. 

Considered as a fundamental principle in statesmanship, 
laissez faire is essentially unscientific. It is necessarily negative, 
while statesmanship is positive. All government, order, and 
progress imply affirmative action, and therefore are the op- 
posite of laissez faire. Science is essentially aggressive ; it 
implies the active policy of investigating, knowing, and control- 
ling things. Every improvement in the arts and sciences, every 
labor-saving appliance, is the result of man's interference with 
nature, of subjecting natural forces to human purposes. By 
studying the laws of chemistry, electricity, and mechanics, we 
know that under certain conditions heat, light, and force are 
developed. And instead of adopting the rule oi laissez faire^ and 
waiting till nature produces the desired result, we have learned 
to bring the particular forces together in just such relations as 
will produce that result much quicker. Consequently, we make 
steam produce our wealth, electricity do our errands, and natural 
forces serve us in every phase of life. 

The saine is trae in the animal and vegetable world. Our 
choicest flowers and vegetables are not the result of unaided 
natural selection, but of artificial cultivation ; that is to say, of 
the scientific application of the law of development. We have 
studied the conditions under which certain kinds of fruit, flowers, 
and vegetables develop their best specimens, and where nature 
fails to supply these conditions they are substituted by man. Our 
fast horses and finest breeds of cattle and sheep have all been 
produced in the same way. What is true in chemistry, mechanics, 
botany, and biology is equally true in sociology. 

Since affirmative statesmanship is necessary to government, 
and government is necessary to civilization, it is a contradiction 
in terms to speak of laissez faire as the basis of statesmanship. 
The science of government is not the knowledge of what not to 
do, but it is the knowledge of what to do and how and when to 
do it. To know what to do implies the knowledge of what fiot to 
doy but to know what not to do does not imply the knowledge of 



286 ERRONEOUS POSTULATES. 

what to do. So long as government exists it must have a function 
— a sphere of action. Scientific statesmanship implies a knowl- 
edge of the principle by which that action should be directed. 
Because the history of state interference with industry is the 
history of mistakes, it is commonly assumed that the only way to 
avoid mistakes of the past is to do nothing in the present. It 
would be just as correct to say that because all mistakes are the 
result of affirmative action, inaction is the only means of avoiding 
error, the logic of which would involve the destruction of the 
human race. We cannot choose between doing and not doing, 
but only between doing wisely and unwisely. The doctrine of 
laissez faire^ therefore^ has no place in the science of statesman- 
ship or the art of government. 

This theory derives its chief plausibility from a seeming uni- 
versality in its postulates, which are : (i) That self-interest is a 
universal principle in human nature. (2) That each individual 
knows his own interest best, and in the absence of arbitrary re- 
strictions is sure to follow it. (3) That free competition always 
develops the highest possibilities by enabling each to do that for 
which he is best fitted, and thereby most surely advances the 
welfare of all. 

The proposition that self-interest is a universal principle in 
human nature is undoubtedly correct ; but there is nothing in 
experience or logic to warrant the assumption that the other 
two follow from it. That whatever is for the best interest of 
each promotes the welfare of all is indisputable, but that each 
individual always knows what is best for his own interest, and in 
the absence of arbitrary restrictions is sure to follow it, is by no 
means certain. 

Before each can know how to promote his own best interest he 
must know what his best interest is, which is precisely what the 
great bulk of the human race do not know. This knowledge can 
only be acquired by a more or less intelligent generalization from 
experience. Whatever tends to improve man's condition materially, 
socially, and morally, and increase the advantages of social life, 
promotes his best interests. To assume that every one knows 
what is best for himself is as unphilosophic as to assume that the 
child knows best what will promote its own welfare. Although 
many parents are ignorant, and often injure when they think to 



IGNORANCE OF SELF INTEREST. 28/ 

help the child, the fact remains that the successful rearing 
of children chiefly depends upon the number of instances in 
which the wisdom of the parent, developed by experience, pre- 
vails over the ignorance of the child. Indeed the race would die 
out if the experience of parents were not transformed into author- 
ity over the child. 

What is true of the child in this respect is still true to a very 
great extent, of a vast majority of the human race. Take for 
instance the people of Central Africa. The principle of self-in- 
terest is as universal there as in any part of the world. But no 
one would seriously claim that the average individual in that dark 
continent knows what is best for his own interest. On the con- 
trary, the most advanced scientists, philanthropists, philosophers, 
and statesmen agree that the best interests of the inhabitants of 
Africa can only be promoted by the interference of more ad- 
vanced and civilized nations. This same lack of knowledge of 
what is best for one's own interest, which is simply ignorance of the 
laws of social development, is still painfully apparent, not merely 
in every country, but, more or less in every class in the most ad- 
vanced countries. Those familiar with the laws of sanitation 
and hygiene know that cleanliness, fresh air, good drainage, and 
wholesom.e food are of vital importance to physical health, and 
therefore are of the highest interest to the laborer. But the ex- 
perience of health authorities shows that only with the utmost diffi- 
culty can the laboring classes, and particularly the poorer and 
more ignorant portion, be induced to pay any attention to these 
conditions. 

So too the employing classes, while more enlightened upon 
questions of science, literature, and art, exhibit scarcely less 
ignorance in regard to their economic interests. Take, for in- 
stance, their attitude towards the social condition of the laborer. 
They have assumed and have acted almost uniformly upon the 
assumption that high wages are inimical to their own interests, 
and consequently that to resist the rise of wages and social im- 
provement of the laboring classes is to promote their own pros- 
perity ; whereas, had they known their true economic relation to 
the laborer, they would have seen that every limitation of his 
social and material progress reacts injuriously upon the per- 
manence and extent of their own prosperity. The reason for 



288 FALSE NOTIONS OF COMPETITION. 

their mistaken attitude is precisely the same as that which gov- 
erns the laborer when he endeavors to improve his condition by 
using dynamite, and when he resists the introduction of improved 
machinery, or evades the instructions of the Board of Health, 
— namely, ignorance of what is for his own best interest. It is 
therefore fallacious to assume that every individual knows his 
own interest best, and in the absence of arbitrary restrictions is 
sure to follow it. 

The idea that free competition always develops the highest 
possibilities by enabling each to do that for which he is best 
fitted, is equally misleading. The popular idea of free compe- 
tition is that it means an unconditional struggle for existence 
among individual units, and that is the sense in which the term 
is usually employed by economists. This view is commonly re- 
garded as the application of the doctrine of natural selection to 
society ; and hence the policy of laissez faire is claimed to be 
based upon the doctrine of evolution. This is a mistaken con- 
ception both of the doctrine of evolution and of the nature and 
function of competition, as will appear from the following con- 
siderations. 

The doctrine of evolution is simply a theory of growth as 
distinguished from that of special providence. It teaches that 
whatever may have been the origin of things,, progress towards 
higher forms of existence in all classes of phenomena takes place 
in accordance with a law of cause and effect, and that higher and 
more complex types of formation and the existence of new func- 
tions, appear only under conditions favorable to their develop- 
ment. In other words, opportunity for actualizing the potential 
qualities of higher types is indispensable to progress. There is 
nothing in this doctrine to warrant the assumption that such op- 
portunity can always, or even generally be best secured by the 
new type for itself, through a mere unrestrained struggle for ex- 
istence. On the contrary, the whole implication is that existing 
types must prepare the way and therefore create a favorable 
opportunity for the birth and growth of the higher type. Much 
of the error in this connection is due to a mistaken use of the 
phrases " nature " and *' natural law." We commonly employ the 
term nature as if it represented only unconscious cosmic forces 
as distinguished from conscious human forces. And thus we 



USE OF THE TERM NATURAL LAW. 289 

Speak of the products of cosmic forces as natural and the prod- 
ucts of human device as artificial, just as if human arrangements 
were necessarily unnatural. 

The term "natural " applies no more to cosmic than to human 
forces. The consciousness and intelligence of man are as natural 
as the unconsciousness of gravitation or of inorganic substances. 
The term " natural " simply means that which is necessary to or 
inherent in the constitution of things. It is natural that man 
should have blood, nerves, and brain, because without these he 
would not be man, but it is equally natural that stones should not 
have them, because in that case they would not be stones. So 
with natural law ; a law is not natural or unnatural because it 
relates to conscious or unconscious objects, but solely because 
it relates to the nature and inherent constitution of things. It 
is just as much in accordance with natural law that under certain 
conditions electricity destroys our house, as it is that under 
other conditions it should light our streets. Natural law is simply 
the order in which phenomena necessarily occur under given 
conditions. Man cannot impose artificial laws ; he can only 
artificially change the relations of objects so that through the 
operation of cause and effect desired phenomena may occur 
sooner, more frequently and more continuously than they other- 
wise would. It is in this way, and in this way only, that man is 
ever able to aid progress. 

Therefore, in considering whether laissez faire ox human inter- 
vention is to be preferred, the question is not whether one is 
more natural than the other, because in any case the result 
will be natural, but it is whether the desired end can be more 
surely obtained by intervention than by the unaided operation of 
unconscious forces. And this will depend entirely upon whether 
those who manipulate the conditions understand the laws of the 
phenomena with which they are endeavoring to deal, and there- 
fore can correctly predicate the result. Ignorant or unscientific 
interference may be worse than laissez faire. But this by no 
means implies that laissez faire is superior to scientific regulation. 

Another expression which is misleadingly employed is " natural 

selection." Here again the term natural is used as if all selection 

were unnatural-that is not blind and unconscious. There are no 

natural and unnatural selections ; there are wise and unwise 

19 



290 NATURAL AND HUMAN SELECTION. 

selections, and there are conscious and unconscious selections. 
It is as natural that ignorance will make poor selections as that 
intelligence will make good ones. Because progress in the physi- 
cal world has taken place mainly by unconscious selection, it is 
assumed that progress in society will necessarily be more rapid 
and continuous under a regime of laissez faire. 

If it were true that in physical phenomena an unconditioned 
struggle of units always produces the highest types and the 
greatest progress, it would not follow that the same should be true 
in society. But it is by no means clear that this is true even in 
the physical world. It is of course true that in the development 
of the earth and other physical formations where surviving 
forms were determined by the action and reaction of unconscious 
physical forces, those forms only were able to survive which 
could withstand the struggle. But it is scarcely less certain that 
many higher forms may have been destroyed during early stages] 
of their development, which, had they been able to reach maturity 
would have been better able to withstand opposing forces thai 
those which did survive. 

It is highly probable that by this means millions of potentiallyS 
higher forms were destroyed in their infancy by mature and lower] 
types of formation. Thus under a regime of pure laissez faire — | 
the action and reaction of blind physical forces — progress may 
have been greatly retarded, while inferior types for ages perpetui 
ated their existence by preventing the development of superioj 
types. Indeed, this is what we see taking place in every domaii 
where laissez faire prevails, and development is left to an unj 
conditioned struggle for existence among individual units. 

In the sphere of vegetation for instance, it is now a matter 
scientific knowledge that the choicest trees and most highly del 
veloped plants of any species may be stunted and even destroyec 
by the presence of weeds and brush that had prior existence. Thi^ 
is a fact that every scientific farmer and horticulturist underj 
stands. As an illustration of the law of natural selection and th^ 
survival of the fittest, we are pointed to wild animals, say a drov( 
of wild horses. It is assumed that those which survive ar^ 
always best and that those which were killed off were inferioi 
from the mere fact that the former lived and the latter died! 
This conclusion, however, does not necessarily follow from thes^ 



SURVIVAL OF THE UNFIT. 29 1 

facts. Suppose, for example, a foal, which possessed all the pos- 
sibilities of being a faster or tougher horse than any in the herd, 
was kicked in the ribs by one of the inferior though mature 
horses and fatally injured. It is quite clear that in that case the 
inferior type would prevent the development of the superior. 
And this is what is constantly taking place wherever an unre- 
strained struggle for existence prevails, as all experienced horse- 
breeders know. By the study of appropriate mating and the 
protection of the superior young against the violence of the 
inferior old, speed, strength, and other desired qualities of the 
horse have been developed to a degree never before known. 
Thus under scientific selection, the higher possibilities of the 
horse have been developed incomparably faster than they ever 
were under natural selection. This is true in every sphere of 
phenomena to which human knowledge can be applied. In fact, 
progress everywhere increases directly, as scientific selection can 
supersede natural selection — in proportion as knowledge of rela- 
tions can be substituted for blind experimentation. Were this 
otherwise, science and civilization would be no better than igno- 
rance and barbarism. Clearly therefore laissez /aire is not the 
surest way to promote the survival of the fittest even in the 
physical world. 

In society this is still more uniformly true by virtue of a differ- 
ent character in the phenomena. One of the most marked dis- 
tinctions between physical and social phenomena is the manner 
in which existing units influence the environment of future units. 
In the lower forms of life the opposition of the inferior mature to 
the superior immature (the established old to the unestablished 
new) is limited to a direct struggle between contending units. 
Consequently, the potentially superior has always a limited chance 
(say one in a million) of surviving, if only by evading the deadly 
opposition of an established type. In society this is different, and 
the chance of the new to escape the repressive power of the old 
is more difficult, Man, having acquired the power of consciously 
adapting means to an end, can not only resist the undeveloped 
new with the advantage of prior possession and mature develop- 
ment, but he also has the power of manipulating the environment 
of the subsequent generation so as to make the development of 
the superior impossible. 



292 GOVERNMENT INEVITABLE, 

One of the prime conditions of human society is consciously 
regulated order, and this implies government. Government neces- 
sarily dominates the social environment of the individual. 
Through social and political institutions, therefore, the opportu- 
nities for enabling the fittest to survive will necessarily be aided 
or repressed according to the notions entertained by those who 
■determine the policy of government. By this means, through 
mere accident of priority, the inferior man can so regulate the 
conditions of existence for subsequent generations that the de- 
velopment of the potentially superior shall be impossible, and 
thus secure the survival of the unfittest instead of the fittest. 

The history of society is replete with evidences of this fact. 
Indeed every arrest of social progress is due to the fact that the 
inferior who obtained possession of authority have so dominated 
the environment as to cut off opportunity for the development of 
others, who with favorable opportunities would have been supe- 
rior to themselves. Under such conditions not only does the 
unfit survive, but its influence tends to perpetuate the reign of the 
less fit in two ways. i. By stifling the germs of superiority in^ 
humble classes, and thus cutting off the possibility of its develop-* 
ment and actualization. 2. By stereotyping the character of the 
successful in giving it a monopoly of power and position. This 
is what took place in ancient Egypt, Greece, and Rome, and in 
mediaeval Europe, where both religious and civil authority was 
exercised to cut off all opportunity for the development of char- 
acter in those classes of the community not recognized as noble 
or royal. The masses, who have ever constituted the laboring 
classes, have been regarded as an inferior portion of society. 
Their social inferiority has not only been made a reason for 
their exclusion from social power and authority, but by destroy- 
ing the opportunity for actualizing their best possibilities it has; 
been made the means of preventing their development and thus] 
keeping them inferior. Laissez /aire, therefore, is literally im- 
possible in society. There can be no choice between natural! 
selection and human selection, but only a choice between scien- 
tific human selection and ignorant human selection ; not betweeni 
government and no government, but only between wise or un- 
wise government interference. 

The chief fallacy underlying the doctrine of laissez /aire is a! 



ECONOMIC COMPETITION, 293 

mistaken notion regarding the nature of competition. Because 
competition is rivalry between contending units it is assumed 
that all rivalry is competition, and hence that free competition 
is simply an unrestrained struggle for existence. As we have 
already seen, unrestrained struggle may and often does mean 
repression and despotism instead of development and freedom. 
It is entirely true that competition is indispensable to develop- 
ment, but in order to have competition that develops instead of a 
struggle that destroys, rivalry must take place under conditions 
which make the object sought reasonably possible to either con- 
testant. There can be no advantageous competition where the 
prize is impossible to one -and certain to the other. Such an 
unequal struggle instead of developing the highest possibilities 
of both competitors, inspires neither contestant to do his best. 
To have effective competition the contest must be of such a 
character as to compel the winner and inspire the loser to the 
maximum degree of effort. This can only occur when the contest 
takes place between approximately equal competing units. Com- 
petition between unequals necessarily tends to crush rather than 
develop the weaker, although he possesses all the potential possi- 
bilities of superiority. 

Take, for instance the child of the poor laborer and that of the 
wealthy merchant. The former is sent to the factory or mine 
without any education or opportunity for social development ; it 
is reared in an atmosphere of ignorance, brutality and vice, while 
the latter receives all the education and incentives for culture 
that wealth and leisure can supply. When these two children 
grow up, can there be any inspiring competition between them as 
citizens for social position, public confidence, or even in the 
sphere of business, where education and mental training are 
necessary, indeed anywhere outside the sphere of manual labor ? 
The difference between them in this respect, which nothing but 
a difference in their opportunities creates, instead of inspiring 
both to do their best, will naturally create a feeling of shrinking 
inferiority in the one and an undue feeling of superiority in the 
other. These two opposite feelings necessarily tend to give the 
power of authority to the latter and the submissive position to 
the former. 

Clearly therefore instead of laissez faire necessarily securing 



294 NECESSITY OF OPPORTUNITY. 

free competition and " the survival of the most fit," it is the 
policy which in society is most likely to prevent free competition 
and to promote the survival of the less fit. It is an indispensable 
condition to free competition and the maximum development of 
the competitors, that the contest should be between approxi- 
mately equal competing units. To secure approximate equality 
among competitors and hence the success of the superior, we 
must secure to each the opportunity for developing his best 
possibilities. In other words, to obtain the inspiring influence of 
free competition and to develop instead of crushing the potential 
capacity of the individual we must substitute scientific states- 
manship for ignorant authority. The question of statesmanship 
then is not whether or not the state shall interfere in the affairs 
of society, — this it is sure to do so long as society exists, — but 
upon what principle it shall act in order to promote maximum 
prosperity and freedom in the community. This involves a con- 
sideration of the economic and social functions of government, 
which will be the subject of the next chapter. 



CHAPTER II. 

THE STATE ; OR, THE NATURE AND FUNCTION OF 
GOVERNMENT. 

Section I. — What is the State? ■ 

It is very common to use the term state as if it were synony- 
mous with society. That such a use of the term is too indefinite 
for scientific purposes becomes apparent the moment we attempt 
to consider the functions of the state. It is essential to the idea 
of society that there be more or less social intercourse and inter- 
dependence among the individual units having some recognized 
common centre of interest and action. This is not true of all 
mankind. The human race is divided into groups or nations 
composed of individuals who have more or less social and indus- 
trial affinity. There is a great diversity of feeling, interest, and 
action within these groups, but each group has a common inter- 
est and will take common action as distinguished from any other 
group or nation. The maintenance of this common interest we 
call patriotism. Society therefore may be defined as an aggre- 
gate of individuals in any group, nation, or tribe. We cannot 
speak of the functions of this aggregate, because in its entirety 
society never acts. Even under pure communism, where the 
greatest uniformity of the units prevails, children, minors, and 
usually though not necessarily, women are excluded from active 
participation. Thus society as an aggregate never acts except 
through a more or less extended representation by which a 
portion acts for the whole. This representative portion, large or 
small, constitutes the state as distinguished from society ; it is the 
largest acting aggregate, and the individual is the smallest acting 
unit. 

295 



296 NO ABSOLUTE RIGHTS. 

The state then may be defined as the conscious authoritative 
expression of society. Since the aggregate is greater than, and 
includes the individual, the authority of the state necessarily in- 
cludes and is superior to that of the individual. The state then 
not only represents the authoritative action of the aggregate 
(society) as distinguished from that of the individual, but its 
authority is necessarily absolute over both the individual unit 
and social aggregate. 

We often hear such expressions as " absolute rights," " inalien- 
able rights," etc. Strictly speaking, there are no such rights in 
society ; not only the right to " liberty and the pursuit of happi- 
ness," but even the right to life in society is necessarily subject 
to the will of the aggregate, as authoritatively expressed in the 
state or government. This is indispensable to the existence of 
society. Society being an association of individuals whose im- 
mediate interests are not always identical and whose conceptions 
of the equity of their relations are frequently very different, the 
existence of a power superior to both, whose authority shall be 
absolute, is indispensable to social order. All rights of the indi- 
vidual in society therefore, must in the very nature of the case, 
be conditional. Absolute individual rights are a social impossi- 
bility. 

It is equally indispensable that these conditions should be de- 
termined and enforced by the collective authority, the state, 
since nothing short of that would command the confidence, sup- 
port, and obedience of the individual units. While the authority 
of the state is always absolute over both individual units 
and the social aggregate, it always represents a consensus of 
both. Although the state is always representative, it does not 
always represent in the same manner, nor derive its authority in 
the same way. In some stages of society collective authority 
is all invested in one person, as in the chief of primitive tribes, 
and forms an absolute despotism. This is sometimes due to 
superior physical force, and sometimes to a fiction of divine ap- 
pointment. In other stages of society authority is invested in 
a number of individuals by hereditary descent, forming an aris- 
tocracy or constitutional monarchy, and in others it is vested 
in a still larger number, chosen by popular vote, forming a 
democratic republic. But in every case the state represents the 



ALL GOVERNMENT REPRESENTATIVE. 29/ 

authority of the aggregate. The Czar's proclamation is not the 
act of a mere individual, but the recognized authoritative expres- 
sion of Russia. The Pope's edict is not the voice of an individual 
Italian, but that of the Church. 

It may be said that one-man-power, as represented by a shah, 
a sultan, a czar, or a pope, is not representative but despotic. 
It is indeed despotic, but it is also representative. Representa- 
tion is to speak and act for others authoritatively. In this sense, 
despotism is no less representative than is democracy, but its au- 
thority to act for others is acquired in a different way. The 
essence of all collective or state authority is that the government 
derives its "powers from the consent of the governed." The ab- 
solute authority of the despots who rule Persia, Russia, and 
Turkey rests upon the consent of the governed as completely as 
does that of the President or Congress in democratic America, If 
the Czar of Russia had not the consent and confidence of the 
Russians, his proclamations would have no more authority in 
Russia than would those of any other individual. It is because 
they recognize his fitness to rule (to act for them) that they obey 
and support him. Their confidence may be misplaced, or may be 
due to a superstitious belief in his divine appointment as the 
head of the church and ruler of the nation ; but whatever the 
reasons, their confidence and consent are none the less complete, 
as is shown by the fact that they will not only work for him and 
worship him, but will by the millions fight and die for him. The 
only difference between despotic and democratic representation 
is that through poverty, ignorance, and superstition, the consent 
of the governed under despotism is given by silent acceptance of 
their rulers as inherently fitted and divinely appointed to govern, 
while under democracy this consent can only be obtained through 
the volitional action of the individuals. Thus the essential dis- 
tinction between despotism and democracy is not that the latter 
is more representative than the former, but that it is more 
elective. Poverty, ignorance, and superstition make political and 
social incapacity inevitable, which in turn make elective represen- 
tation impossible. 

Just in proportion as the individual units of a community be- 
come more intelligent and positive in character, does their con- 
sent to the authority of the state become less dependent upon 



298 ELECTIVE REPRESENTATION, 

traditional usage and supernatural injunction, and more de- 
pendent upon individual judgment. Hence it changes from 
silent acquiescence to conscious choice, and then the repre- 
sentative function of the state becomes less hereditary and more 
elective in character. In such countries as Persia, Turkey, and 
Russia the consent of the governed to the authority of gov- 
ernment consists entirely in silent acquiescence, while in such 
countries as Austria, Italy, and Germany, where material condi- 
tions and the intelligence of the people are more advanced, there 
is a limited amount of elective representation. In England the 
elective principle is still more general, and in America it is most 
general of all, being directly or indirectly applied to every branch 
of government. But there is no country in which the repre- 
sentation is all elective. Even in democratic America women are 
still excluded from elective representation. The state, or col- 
lective governing authority, sustains exactly the same representa- 
tive relation to women in the United States as does that of the 
Czar of Russia or the Shah of Persia to the whole people of those 
countries. Hence the state, whether despotic or democratic, is 
always the authoritative expression of the aggregate. 

This is only another form of stating the principle so frequently 
emphasized in these pages — namely, that all social institutions 
rest upon the habits and social character of the people. Society, 
therefore, differs from the individual, in that it represents a 
literal aggregate of which individuals are the units. The 
state differs from society and from the individual, in that it is 
the representative collective action of both, and its authority is 
absolute over both. In short, the state expresses authoritative 
social policy. 

Section II. — The Relatio^t of the State to the Individual in 
Progressive Society, 
In order to ascertain the true relation of the state to the indi- 
vidual, it is necessary, first of all, to examine the structural con- 
stitution of society. This brings us directly to the question, is 
society a higher organism, for whose preservation and develop- 
ment the individual units are the tributary means, or is it an asso- 
ciation created by and utilized for the preservation and develoji- 
ment of the individual units composing it ? Upon the answer to 



GREEK IDEA OF SOCIETY. 299 

this question depends the character of statesmanship and the 
governing principle by which public policy should be shaped and 
directed. If society is an organic entity, to whose development 
the individual is subordinate and simply tributary, then the true 
public policy would be to increase the functions of the state and 
limit the sphere of individual action and authority. And con- 
versely, if the development of the individual is the end to pro- 
mote which society is only a means, the true public policy 
would be to so mould and direct public institutions as to increase 
the functions, responsibility, and authoritative sphere of the indi- 
vidual, and to diminish those of the state. It will be observed 
that these two conceptions of the relation of the state to the indi- 
vidual logically lead to opposite theories of statesmanship, the 
one towards socialism and the other towards individualism. 

It is a peculiar feature of sociological literature that both 
socialist and individualist writers assume that society is an organic 
entity, and that it sustains the same relation to individuals 
that the individual organism does to the parts of which it is com- 
posed. This was the controlling idea of the Greeks and Romans, 
who regarded the state as every thing and the individual as noth- 
ing, except as he served the state. In his ideal republic, Plato 
makes the state stand for a great personality, in whom the differ- 
ent social classes are simply the functions. The ruling class, the 
military class, and the industrial class are presented as corre- 
sponding to the faculties of reason, will, and passion or force in 
the human organism. Upon this point at least, it may be truly 
said that all that has been written during the last two thousand 
years has been simply Platonizing, Hobbes endeavored to es- 
tablish literally by minute detail what Plato only introduced in 
general outline, by making society a colossal artificial man. He 
not only made certain classes of the community correspond to 
the reason, will, and passion of the human organism, but he went 
so far as to divide society into limbs, joints, nerves, memory, con- 
science, and even ascribed to it a soul.^ 

This idea, with some qualifications eliminating the minutiae of 
detail introduced by Hobbes, is reaffirmed and extensively elabo- 
rated on the basis of modern science, by Herbert Spencer. 

^ See preface to his ' ' Leviathan ; or, The Matter, Form, and Power of a Com- 
monwealth, Ecclesiastical and Civil." 



300 SOCIAL ORGANISM THEORY. 

Therefore Rodbertus had the full warrant of the continuous 
teachings of philosophy from Plato to Spencer for his basic- 
socialistic postulate that '' the community is the end in itself. In- 
dividuals are only the means for the promotion of social well- 
being ; they are in no sense ends in themselves." ^ From this 
point of view he logically held that public policy should constantly 
be directed towards putting the ownership of property, especially 
the means of production into the hands of government. This 
idea has been more thoroughly developed by Karl Marx, 
who endeavors to show that from the nature of economic 
phenomena the ownership of the means of production can only 
reside in the community, which theory is made the basis for 
public policy by all shades of socialists. That socialists should 
readily accept the traditional theory is not surprising, because it 
sustains their a priori assumption that the state should do every 
thing. But with Mr. Spencer the case is quite different, as he is 
the most extreme representative of the individualist school. 
He regards socialism as slavery,^ and state ownership and con- 
trol of industrial enterprises as inimical to progress. Now 
the supremacy of industrial individualism is incompatible with 
the existence of a social organism. The question, however, is not 
whether Mr. Spencer's position on the organic structure of society 
is consistent with his theory of individualism, but whether it is 
scientifically and philosophically sound. This is the more im- 
portant, because Mr. Spencer stands pre-eminently for the scien- 
tific method of investigation. Indeed, his conclusions upon this 
point are regarded as the sociological embodiment of the doctrine 
of evolution, and maybe taken as representing those of evolu- 
tionists generally upon this subject. The fact that Mr. Spencer 
occupies this leading position in the world of scientific sociology 
makes a careful consideration of his position on this subject of 
the utmost importance. In setting forth his reason for conclud- 
ing that society is an organism, he says : 

" So completely, however, is a society organized upon the same 
system as an individual being, that we may almost say there is 
something more than analogy between them. ... A still more 
remarkable fulfilment of this analogy is to be found in the fact, 

^ Political Science Quarterly, September, 1889, p. 546. 

^ " The Coming Slavery," Popular Science Monthly, April, 1884. 



SPEA^CER'S THEORY OF SOCIETY. 3OI 

that the different kinds of organization which society takes on, in 
progressing from its lowest to its highest phase of development, 
are essentially similar to the different kinds of animal organi- 
zation." 

After a detailed illustration of the similarity between society 
and an individual organism, he says : 

" Thus do we find, not only that the analogy between a society 
and a living creature is borne out to a degree quite unsuspected by 
those who commonly draw it, but also that the same definition of 
life applies to both. Thus the union of many men into one com- 
munity — this increasing mutual dependence of units which were 
originally independent — this gradual segregation of citizens into 
separate bodies, with reciprocally subservient functions — this for- 
mation of a whole consisting of numerous essential parts — this 
growth of an organism, of which one portion cannot be injured 
without the rest feeling it — may all be generalized under the law 
of individuation. The development of society, as well as the de- 
velopment of man, and the development of life generally, may be 
described as a tendency to individuate — to become a thing. And 
rightly interpreted, the manifold forms of progress going on around 
us are uniformly significant of this tendency," ^ 

In a later work,^ Mr. Spencer discusses the social organism at 
still greater length and defends his conception from the inconsis- 
tencies of the Greeks and also against those of Hobbes. After 
criticising these writers, he says : 

" Notwithstanding errors, however, these speculations have 
considerable significance. That such analogies, crudely as they 
are thought out, should have been alleged by Plato and Hobbes 
and many others, is a reason for suspecting that some analogy 
exists. The untenableness of the particular comparisons above 
instanced is no ground for denying an essential parallelism ; for 
early ideas are usually but vague adumbrations of the truth. 
Lacking the great generalizations of biology, it was, as we have 
said, impossible to trace out the real relations of social organiza- 
tions to organizations of another order." ^ 

He then discusses the points of general analogy between 
society and living organisms, which he sums up by saying : 

' " Social Statics," pp. 490, 493, 497. See also " First Principles," pp. 408, 
413, 433-437. 

^ "Illustrations of Universal Progress," chap. x. 
^ Ibid.^ p. 391. 



302 SOCIETY AND LIVING BODIES, 

'' Thus we find but little to conflict with the all-important 
analogies. . . . The principles of organization are the same ; 
and the differences are simply differences of application. Here 
ending this general survey of the facts which justify the com- 
parison of a society to a living body ; let us look at them in 
detail." ' 

After devoting thirty pages to the discussion of details sustain- 
ing this analogy he concludes by saying : 

" Such, then, is a general outline of the evidence which justifies, 
in detail, the comparison of societies to living organisms. That 
they gradually increase in mass ; that they become little by little 
more complex ; that at the same time their parts grow more 
mutually dependent ; and that they continue to live and grow as 
wholes, while successive generations of their units appear and 
disappear, are broad peculiarities which bodies politic display, 
in common with all living bodies, and in which they and living 
bodies differ from every thing else." ^ 

It will be seen from the foregoing that although Mr. Spencer 
objects to Hobbes' presentation of the analogy between the social 
and the human organization, he quite as emphatically holds to 
the conclusion that society is an organism, whose organic struc- 
ture is fundamentally the same as that of animal organisms. If 
this be correct, it of course follows that the relation of the units 
to the aggregate is the same and that the order of progress in 
society is the same as in the animal organism. In short, that a 
biological hypothesis adequately explains sociological phe- 
nomena. 

The fact that a theory correctly accounts for one class of phe- 
nomena does not warrant its application to another, unless it can] 
be shown to adequately explain the new phenomena independently 
of its use in any other field of investigation. If we examine] 
social phenomena independently of biological hypothesis, we] 
shall find : (i) That although there is a general resemblance be-J 
tween society and the animal organism, the difference betweei 

' " Illustrations of Universal Progress," pp. 397, 398. 

^ Ibid., p. 428. That this represents Mr, Spencer's views upon the subject is! 
shown by the fact that it is repeated in his latest utterances. See *' Sociology.' 
Also correspondence with Huxley in the Times, September, 1889, republished in 
the Popular Sciejice Monthly, February, i8go. 



SPENCER'S POSTULATES. 303 

them is sufficiently radical and fundamental to destroy the basis 
for the conclusion that society is an organism. (2) That such an 
assumption is not necessary in order to apply the theory of evo- 
lution to social phenomena. 

It is unquestionably true that there are many points of re- 
semblance between society and individual organisms, and so there 
are between individual organisms and inorganic bodies. The 
question, therefore, is not whether there are any points of agree- 
ment between society and an organism, but whether the points of 
agreement are sufficiently numerous and fundamental to make 
them constitutionally identical. Mr. Spencer presents four char- 
acteristics in which society resembles an individual, which he re- 
gards as sufficiently fundamental to warrant the classification of 
society as an organism ; they are : 

" I. That commencing as small aggregations, they insensibly 
augment in mass : some of them eventually reaching ten thousand 
times what they originally were. 

" 2. That while at first so simple in structure as to be con- 
sidered structureless, they assume, in the course of their growth, 
a continually-increasing complexity of structure. 

" 3. That though in their early, undeveloped states, there exists 
in them scarcely any mutual dependence of parts, their parts 
gradually acquire a mutual dependence, which becomes at last so 
great that the activity and life of each part is made possible only 
by the activity and life of the rest. 

" 4. That the life and development of a society is independent 
of, and far more prolonged than, the life and development of any 
of its component units, who are severally born, grow, work, re- 
produce, and die, while the body politic composed of them sur- 
vives generation after generation, increasing in mass, completeness 
of structure, and functional activity." ^ 

There can be little doubt that in these four characteristics 
society resembles the animal organism ; nor can there be any 
doubt that the first two apply with equal force to inorganic de- 
velopment. These are as true of the development of inorganic 
substances as they are of the growth of plants, animals, or society. 
If, therefore, we are to assume that society is an organism because 
in these general and important respects it resembles an individual, 
then may we not say that vegetable and animal bodies are in- 

^ "Illustrations of Universal Progress," pp. 391, 392. 



304 SPENCER'S ERROR. 

organic, because, in these fundamental characteristics they re- 
semble inorganic bodies ; and vice versa. If we should attempt 
to draw any such conclusion, Mr. Spencer would soon correct us 
by pointing out that the lower we go in the scale of development 
the greater is the simplicity and similarity of form. And thus, 
while in the first two characteristics animal organisms are similar 
to those of inorganic bodies, in the last two they greatly differ ; 
for, though mineral substances like organisms, increase in mass 
and complexity of structure, they do not develop the functional 
dependence of parts exhibited in the individual organism.^ 

If the fact that the individual organism has functional activi- 
ties different from those of inorganic bodies, establishes the 
distinction between their classification as organic and inorganic, 
it follows that a similar difference between the constitution of 
society and that of an individual organism equally warrants a dis- 
tinction in their classification. If we examine the constitution of 
society and the individual organism, we find the following radical 
distinctions which are quite as great as those between organic 
and inorganic bodies as pointed out by Mr. vSpencer. 

I. In an individual organism progress consists in the differ- 
entiation and specialization of functions in which the aggregate 
tends to gain a more complete control over the action of the parts, 
such as eyes, ears, teeth, tongues, feet, hands, etc., whereas in 
society progress consists in a differentiation of functions and 
definiteness of polity in which the parts constantly tend to acquire 
an increasing control over the action of the aggregate. 

II. In an individual organism the end of the parts is to serve 
and sustain the aggregate or organism, and when they fail to 
serve that end they become atrophied and disappear, whereas in 
society the end of the aggregate is to serve and sustain the 
individual units. 

III. In an organism, where consciousness and intelligence exist, 
they reside in the aggregate and never in the parts ; whereas in 
society consciousness and intelligence reside always in the parts 
and never in the aggregate. Indeed, the social aggregate has 
none of the attributes of a conscious entity. 

^ " Even such inorganic bodies as crystals, which arise by growth, show no such 
definite relation between growth and existence as organisms." — " Illustrations of 
Universal Progress," p. 392. 



SOCIETY NOT AN ORGANISM. 305 

IV. In an organism the existence of the parts is subsequent to, 
dependent upon, and developed through the unconscious action of 
the aggregate ; whereas in society the aggregate and its polity or 
representative action, is subsequent to, dependent upon, and de- 
veloped through the conscious action of the parts. 

V. In an organism the influences which promote differentiation 
of function must operate upon the aggregate or organism, and 
through it affect the parts ; whereas in society the influences 
which promote differentiation must operate upon the paits or in- 
dividual units, and through them affect the constitution of the 
aggregate and its active polity. 

VI. In society conscious wants, intelligence, and will, are the 
characteristic attributes of the units through which all the in- 
fluences affecting the differentiation of the social aggregate 
must finally act ; whereas in the individual organism the units 
have no such characteristics ; where these characteristics exist at 
all they are the attributes of the aggregate and not of the units, 
and in the lower forms of animal and all vegetable organisms 
they do not exist at all. 

It will thus be seen that, despite the general resemblance be- 
tween society and an individual organism, the difference in the 
functional relation of the parts to the aggregate, and the order of 
their development, is quite as marked and more fundamental 
than that between organic and inorganic bodies. The differ- 
ence between the organic and the inorganic consists mainly in 
the fact that the complexity of structure and interdependence of 
the parts are greater in the former than in the latter ; whereas 
the difference between society and an organism consists in the 
fact that the units sustain an opposite relation to the aggregate, 
and that progressive differentiation is in an opposite direction : 
in society the tendency being to increase the conscious control 
of the parts over the aggregate, and in an organism to increase 
that of the aggregate over the parts. So far from being an 
organic entity, society is only the systematized environment of 
associated individuals by whom and for whom it is created, and 
upon whose state of industrial, social, and intellectual develop- 
ment its existence, form, and character depend. 

Nor is this view inconsistent with the doctrine of evolution. 

This theory does not involve the assumption that society is an 
20 



3o6 SOCIAL PROGRESS UNLTKE PHYSICAL. 

organism. Evolution simply implies a progressive movement 
from a less to a more definite, coherent, orderly state of existence. 
But it does not follow that the more complex form must neces- 
sarily be organic ; since in that case inorganic development would 
not be evolution. Although evolution implies a greater definite- 
ness of functional relation, it does not necessarily mean the 
individualization of the aggregate. It is not strictly correct 
therefore, to say " the development of society as well as the de- 
velopment of men and the development of life generally may be 
described as a tendency to individuate — to become a thing." So- 
ciety does not tend to become a thing, in the sense of an organic 
entity. Progress in society is not a tendency to individualize the 
social aggregate, but rather to de-individualize it, making its 
action more and more the consciously delegated expression of 
the individual. Indeed, the only individuality which social prog- 
ress develops is in the units ; institutions are specialized, but 
man only is individualized as an organic entity. If we regard 
society as an association of individuals for their common protec- 
tion and further development, the theory of evolution becomes 
rationally applicable to social as well as organic and inorganic 
phenomena. From this point of view the assumption that society 
is an organism is unnecessary, and the anomaly of creating a 
colossal social man with increasing despotic power over the 
individual disappears. Social progress then is seen to be an 
orderly movement towards greater individual perfection, and per- 
sonal freedom for man, which accords with universal history. 

So far as human knowledge goes, the highest individual or- 
ganism yet developed is man. In every stage of physical 
development, from the most incoherent homogeneous form 
known or inferred, the movement has been towards higher and 
more complex types of formation, each of which tended to make 
the existence of the next possible. And the crowning product 
of the whole series of inorganic and organic evolution is man. ,j 
With the appearance of man began another phase of develop- 
ment which was neither inorganic nor organic, but social, 
Progress in this sphere does not consist in the unconsciou 
differentiation of an inorganic mass, nor in that of a livini 
organism, but in a systematization of the environment an 
specialization of the efforts of individuals, which results in 



( 



SPENCER UNWITTINGLY SOCIALISTIC, 307 

further development of the individuality of the units. It thus 
appears that man occupies the objective or crowning position 
in both physical and social evolution ; with this difference 
however : in the physical world he presents the highest 
type of an organic aggregate, and in society he occupies the 
position of a unit. Thus although evolution is fundamentally 
the same in society as in the physical world, in that it is a move- 
ment from the simple to the complex, the order of development 
is reversed ; in the physical world, it is a subordination of 
the parts to the perfection of the aggregate, and in society it 
is a subordination of the aggregate to the perfection of the 
units. In order therefore, to complete Mr. Spencer's statement, 
that " the development of society as well as the development of 
man and the development of life generally, may be described as a 
tendency to individuate — to become a thing," we must add, 
that this individuating tendency ends in the greater individual- 
ization, not of society, but of man — physically as an organism, 
and socially as a sovereign personality. 

It is evident, therefore, that the Greek and Roman conception 
that the state is every thing, the individual nothing ; and the 
socialistic position logically deduced therefrom, that ^'' the com- 
77iunity is the end in itself, individuals being only the means for 
the promotion of social well-being, and in no sense ends in them- 
selves " ; and Mr. Spencer's assumption that " society is an organ- 
ism," are essentially erroneous. In this, as in all other cases of 
reasoning from mistaken hypotheses, the error only becomes 
important when the theory is made the basis of action. Like 
many of the immature postulates of the English economists, 
already referred to, Mr. Spencer's theory of a social organism 
unwittingly lays the logical basis for state socialism, a theory 
which he himself regards as the greatest of modern fallacies. 

The difference between Rodbertus and Mr. Spencer is precisely 
the same as the difference between Marx and Ricardo.^ Marx 
arrived at the conclusion that profits are robbery by the logical 
application of the Ricardian postulate that the quantity instead 
of the cost of labor determines value. And Ricardo avoided the 
fallacy of Karl Marx only by failing to consistently apply his 
: own postulate. So the theory of state socialism developed by 

' Part III., chap. vi. 



308 PROFESSOR CLARK'S VIEW. 

Rodbertus is logically sustained by the Spencerian postulate that 
society is an organism, and Spencer avoids the fallacy of social- 
ism only by disregarding his own hypothesis. 

We are therefore warranted in concluding that society is not a 
colossal " artificial man," as affirmed by Hobbes, nor an " organ- 
ism " as affirmed by Spencer, nor an " end in itself," as affirmed by 
Rodbertus ; but on the contrary, that it is an association of indi- 
viduals as a means for the promotion of individual well-being. 
Indeed the history of government is the history of making 
and unmaking social institutions in order to render them more 
subservient to the needs of the social life of the individual. 

Nor is this view confined to Spencer and the socialists, but it 
is beginning to be accepted by liberal economists. Thus in his 
chapter on " The Basis of Economic Law " Professor Clark says : 

" The analogy between society and the human body was familiar 
to the ancients. It is a discovery of recent times that a society 
is not merely like an organism ; it is one in literal fact. . . . 
Political economy treats not merely of the wealth of individuals 
who sustain complicated relations with each other, but of the 
wealth of society as an organic unit." ^ 

In a subsequent chapter (" Theory of Value ") he makes this 
social organism into an active contracting personality who buys 
every thing from the individual and sells every thing to him, and 
says : 

" Exchanges are always made between an individual and society 
as a whole. In every legitimate bargain the social organism is a 
party. Under a regime of free competition, whoever sells the 
thing he has produced, sells it to society. His sign advertises the 
world to come and buy, and it is the world not the chance 
customer that is the real purchaser. Yet it is equally true that 
whoever buys the thing he needs, buys it off society. ... In the 
process the social organism is true to its nature as a single being 
great and complex, indeed, but united and intelligent. It looks 
at an article as a man would do, and mentally measures the 
modification in its own condition which the acquisition of it 
would occasion, or which the loss of it would occasion, if once 
possessed." '^ 

It will thus be seen that according to Professor Clark society 
is not merely an organic entity, but it is a single intelligent be- 

* " Philosophy of Wealth," pp. 38, 39. 
2 Ibid., pp. 85, 86. 



CONFOUNDING METAPHOR WITH FACT. 309 

-ing. If the analysis of the economic relation of individuals to 
society presented by Professor Clark is correct, then economic 
collectivism is scientifically sound and should be accepted as 
the basis of industrial statesmanship. But is the analysis correct ? 

Is it true that " exchanges are always made between individuals 
and society as a whole " ? Do such economic relations actually 
exist ? Where, how, and under what conditions does society "as 
a whole " buy wheat, potatoes, shoes, clothes, furniture, etc., from 
individuals ? When farmers and manufacturers take their 
products to the market they do not sell them to society, but 
to individuals, who invariably purchase them either for their 
own consumption or to resell them to other individuals. Nor 
does society, as an organism of which individuals " are but atoms," 
consume any of these products. They are consumed by indi- 
viduals, and by individuals only. Neither is the statement that 
"his sign advertises the world to come and buy, and it is the 
world and not the chance customer that is the real purchaser," 
any nearer correct, if the term world is used in any other sense 
than the individuals in the world. 

The social market simply expresses the aggregate consumption 
of individuals constituting any social group. Neither is there 
any truth, except as a metaphor, in the statement that "the social 
organism is true to its nature as a single being, great and complex, 
indeed, but united and intelligent. It looks at an article as a 
man would do, and mentally measures the modification in its own 
condition." Society, as an entity, does nothing of the kind. All 
the " mental measurement," all the " intelligence," all the con- 
scious action, is performed by individuals. A hundred indi- 
viduals equally intelligent do not constitute a single intelligence 
a hundred times as great as one. An intellectual giant cannot 
be made by simply adding mental Liliputians. Intelligence 
can only be increased by developing it in the individual organism. 

Notwithstanding the immense advantage of society over isola- 
tion — and it constitutes all the difference between savagery and 
civilization, — there are no facts to warrant the assumption that 
society is a new acting entity, much less an individual organ- 
ism. On the contrary, the advantage of society is entirely to 
individuals through their association with each other. In short, 
society is an association of individuals for the better promotion 



3IO THE FUNCTION OF GOVERNMENT, 

of their own well-being, and therefore, in studying the law of 
economic movement we must have for our basis the individual ; 
in no other way can social progress be promoted. 

Section III. — The Function of Government ; or^ The Control- 
ling Principle in Statesmanship. 

Having seen what the state is and the relation it sustains to the 
individual, we are now in a position to consider its function as a 
factor in civilization. Nor will this be a difficult task, if we bear 
in mind the points already established, namely : that the state is 
but the representative expression of associated individuals, and 
that progress in society is a tendency towards the greater indi- 
vidualization of man, both a physical organism and as a sovereign 
social personality. As already pointed out, social progress has two 
fundamental characteristics ; one is economic, the other social. 
The former is a tendency towards more wealth for the individual ; 
the latter is towards more freedom for the individual. How to 
promote the increase of wealth and freedom for the individual 
therefore, is the problem of statesmanship and the end to which 
collective authority, or state action, should ever be directed. 

In considering this question it should be remembered that 
neither wealth nor freedom can be authoritatively given to the 
individual ; they must be taken by him. The only way in which 
the state can give wealth to the individual is by charity. Wealth 
so acquired, instead of promoting freedom, is one of the most 
powerful means of preventing it. Charity in any form tends to 
create obligation, stereotypes dependence, and thereby destroys 
individuality, and makes freedom impossible. The history of 
freedom is a history of the increase of the sovereignty of the 
individual over his own actions and the diminution of that of the 
state. It is sometimes said " that government is best which 
governs least." It would be more correct, however, to say that 
people is best governed which needs the least government. We 
should be careful, however, not to confound freedom with inde- 
pendence. The savage is independent of social restrictions, but 
he has very little freedom. He is in constant danger of his life 
from the defencelessness of his position. He has no friends 
because he befriends nobody ; he can obtain no assistance or 
protection because he assists and protects nobody. Indeed it is 



VIRTUE OF INTERDEPENDENCE. 3II 

because he is the least dependent upon his fellows that he is the 
most helpless and has the least freedom of any man in the world. 
Mutual dependence is the greatest promoter of freedom. When- 
ever the freedom of each depends upon the freedom of all, no one 
has any interest in preventing it, but every one has an interest in 
extending it. Mutual dependence cancels obligation and extends 
freedom, while dependence creates obligation and restricts 

' freedom. It is only when everybody's safety depends upon pro- 
tecting the safety of his neighbor that freedom extends along the 
whole line of human relations. With the dependence upon 
authority the case is entirely different. There the obligation is all 
on one side. It is the relation of creditor and debtor, of the 
giver and receiver, of the master and ward, and not that of 
mutual helpers and the receivers of equivalents. Dependence 
upon authority is scarcely less inimical to freedom than non- 
dependence upon society. The one involves savagery and the 
other despotism. It is only the mutual assistance born of indi- 
vidual interdependence that can make the highest social life and 
the maximum individual freedom possible. In other words, the 
highest individualism promotes the most complete co-opera- 
tion of effort, unity of interest, equity of relations, freedom of 
action, and complexity of social life. Evidently then, it is the 
duty of the state to promote in every way possible the develop- 
ment of the individuality of its citizens, increase their mutual de- 
pendence upon each other and to decrease their dependence upon 

' the government. Upon what lines should the public policy be 
directed to accomplish this result ? Paternalism fails to promote 
this end, because it tends to lessen instead of increase the activi- 
ties and responsibilities of the individual. Nothing develops 
power but activity, and nothing creates activity but the necessity 
for it. We never put forth effort to do for ourselves that which 
others will do for us. Since inaction is fatal to progress, the in- 
crease of paternalism is necessarily a great barrier to individual 
development. Nor is it less erroneous to assume that the sover- 
eignty of the individual can best be promoted by merely restrict- 
ing the sphere of governmental activities. It would be as correct 
to say that the withdrav/al of parental care and education from 
children is the best means for developing the highest manhood. 
The way to increase the sovereignty of the individual is not to 



312 BASIS OF PUBLIC POLICY. 

arbitrarily lessen the functions of the state, but to make its 
activities less necessary. The necessity of state action can be 
minimized only by maximizing the capacity of the individual. To 
break the egg from without is almost certain to injure if not kill 
the chick, but when it is broken from within by tl^ increasing 
power of the chick itself, it only breaks when the chick is strong 
enough to do without it. So in society ; the authority of the state 
over the individual should not disappear by weakening the forces 
without, but by increasing those within him. In short, the indi- 
vidual is the initial point of social movement. 

The more intelligent and highly developed the character of the 
individual, the more capable he is of doing for himself and more 
reluctant to have others do for him. Hence, throughout the his- 
tory of society we see that the greater the ignorance and poverty 
the more marked is the lack of individuality in the social units ; 
and the weaker the character of the individual, the more despotic 
is that of the government. A most significant fact in this move- 
ment is, that this transfer of authority from the state to the indi- 
vidual has always been exacted by the individual and reluctantly 
yielded by the state.^ Indeed it is a fundamental principle in 
both nature and society that man can only continuously have 
that which he can demand and maintain by force of character. 
Therefore the increase of wealth and the freedom of the indi- 
vidual must come through influences which tend to envelop his 
character, thereby making paternalism less necessary and des- 
potism less possible. 

It may therefore be laid down as a fundamental postulate in 
scientific statesmanship, thai the co7iirolling principle in public pol- 
icy should ever he to minimize the necessary sphere of governmental 
action and authority., and to maximize the possible sphere of individual 
action and responsibility. In other words, the function of govern- 
ment in all phases of industrial, social, and political life is to 
promote the development of the highest possibilities of the 
individual. 

^ Witness the protracted agitation that is always necessary to extend the rights 
of the individual in any direction, the right of individual judgment in religion, 
the right to vote, the right for M^omen to own property, the right to hold public 
office without regard to religious views, the right to democratic government, the 
right for women to vote, even in a Republic, etc. , etc. 



DISADVANTAGE OF STATE ACTION. 313 

In order to understand the lines of action which the application 
of this principle involves, it is necessary to consider : (i) Why, 
on general principle, individual effort and responsibility are pref- 
erable to state action and authority ; (2) What, class of things 
can be administered better by the state than by the individual ; 
(3) What line of public policy should be pursued in order to 
maximize the sphere of individual action and responsibility and 
thereby minimize the necessity for governmental authority. 

I. On general principle, individual action and responsibility are 
preferable to state action or collective authority, because they 
possess the maximum possibility of directness, efficiency, econ- 
omy, and equity. State action, being representative whether 
elective or not, is necessarily indirect and arbitrary. Arbitrary 
action always involves the maximum amount of inequity and 
mistakes, because it is necessarily governed by stipulated rules, 
and therefore cannot be modified to suit the great variety of 
individual cases. The universal experience of mankind confirms 
the assumption that whenever individuals can settle their affairs 
between themselves, the adjustment is most likely to be equitable 
and mutually satisfactory, and hence the decision of a third 
party should always be a matter of last resort. 

This does not mean that all courts and other forms of governmen- 
tal action, or even war, are unmixed evils ; it only means that they 
are necessarily clumsy, because arbitrary means of accomplishing 
the desired end. Indispensable as war may have been, and im- 
portant as armies, navies, and policemen still are, it is universally 
admitted that the less the necessity for using them the better. It 
is because of the injustice v\^hich always accompanies battle-field 
decisions that war diminishes as individuality in the average 
citizen increases and civilization advances. The same arbitrary 
element runs through all collective action, though it is some- 
times indicated in less violent and repulsive forms. 

Take, for instance, taxation. How to equitably adjust taxation 
has been a perplexing problem since human society began. It 
is because taxes are levied by representative authority, according 
to some arbitrary rule which is utterly incapable of being adapted 
to a very great variety of conditions, that injustice is constantly 
being done to numerous individuals and frequently to whole 
classes. The same principle shows itself in our best courts 



314 THE DIVIDING LINE IMPORTANT, 

of justice, notwithstanding the jury systeni and the immense 
learning of advocates and judges. When a case is given to a 
jury the legal limits to their decision are fixed by the judge in 
his charge. They may think the defendant morally innocent or 
actually justified in his act, but by virtue of a legal technicality 
they are forced to vote him guilty and subject him to a punish- 
ment which both individually and collectively they would regard 
as unjust. And so on through the whole history of legal de- 
cisions. It is because of this preponderating probability of legal 
inequity that in civil cases wherever disputants can adjust the 
difference themselves they are generally encouraged to do so by 
the court. State action being necessarily arbitrary, and hence 
seldom capable of the highest efficiency, economy, and equity, it 
is important to consider what class of things, if any, can natu- 
rally be administered by the state better than by individuals, and 
vice versa. 

2. Since association is better than isolation, and since govern- 
ment is necessary to society, it follows that while there are many 
things which the individual can do better than the state, there 
are some things which the state can do better than the indi- 
vidual. How shall we determine between the sphere of state 
and individual action ? If we take an extreme case from 
either class, there is no difficulty in deciding to which sphere it 
naturally belongs. For instance, if it is a question of determining 
one's own religious opinions, we have now no difficulty in deciding 
that it belongs entirely to the individual. And on the other hand^ 
if it is a question of public defence, such as requires an army and 
navy, we have no difficulty in deciding it to be clearly one of 
the functions of the state. But when we come to the outer edges 
of these spheres of action where they merge together, the line of 
demarcation is not so easily observed. Here a new difficulty 
arises, because this is not only the point where a wise decision is 
most important, but also where the material for making a wise 
decision is most difficult to obtain. Although there is no differ- 
ence of opinion to-day as to whether or not the individual should 
choose his own religion or the government should control the 
army, there is an immense difference of opinion as to whether 
telegraphs, banks, mines, and railroads should be conducted 
by private enterprise or under state control. The difference be- 



SPHERE OF INDIVIDUAL ACTION. 315 

tween the administration of the post-office and that of the tele- 
graph is so slight that public management of the former is made 
the basis for demanding state control of the latter. And if we 
have nothing upon which to base our decision but the facts in 
the two particular cases, it will be very difficult to decide. And 
if government control is extended to the telegraph, the question 
between that and the railroad becomes equally difficult to deter- 
mine. The steps from the railroad to the mine, from the mine 
to the farm, from the farm to the factory, are all equally short 
and, of themselves, difficult to determine. It is necessary there- 
fore, to have some broader generalization upon which to base our 
decision than the data which each individual case furnishes. This 
can only be found by viewing each individual case in the light of 
the general class to which it belangs. Since in the progress of 
society there is a constant tendency to transfer functions from 
one sphere to another, it is in the distinctive characteristics of 
these functions that we must seek the principle governing the 
line of demarcation between the proper sphere of state and indi- 
vidual authority, and thus be able to establish a scientific basis 
for determining whether or not in any given instance the sphere 
of state action should be extended or restricted. 

If we study the evolution of society from its homogeneous 
form, in which every thing was done by authority, to its present 
highly complex state, where most things are done by individual 
enterprise, we can readily see the leading characteristics of those 
functions which tend to pass from the state to the individual and 
those which tend to become recognized as distinctively the func- 
tion of government. Among the things which have indisputably 
passed to the sphere of individual authority are the right to per- 
sonal freedom, the selection of one's partner in life, and the 
charge of one's own children, the right of free speech, and of 
making industrial contracts. 

The reason why these are relegated to the individual is that in 
all such cases there are many subtleties in which the individual 
is more directly interested, and about which he is more com- 
petent to decide than any third party can possibly be ; and these 
subtleties increase with the advancing complexity of social rela- 
tions. Moreover in many of these intricate personal relations 
the decision must be made at once in order to be effective, 



3l6 SPHERE OF STATE ACTION, 

and therefore can be made only by the individual himself. 
The arbitrary, red-tape character of government action neces- 
sarily precludes complete knowledge of detail and the prompt 
action necessary in such cases. Although no individual is yet 
perfect in this regard, he has infinitely greater possibilities of be- 
coming so than any form of representative authority can pos- 
sibly have. 

This is equally true of economic relations. In the early stages 
of society, when industry was very simple, being practically 
limited to agriculture, with crude hand-methods of production, it 
could be conducted by collective authority. But as wants were 
multiplied and occupations differentiated, economic relations 
grew more involved, and a more special knowledge became 
necessary, which made arbitrary administration very much less 
efficient. Consequently the ownership of property and the 
administration of productive enterprise gradually pass from 
public to private ownership and control, or from the sphere of 
state to that of individual authority, in proportion as the division 
of labor, the concentration of productive effort, and the social 
freedom of the individual increased. 

On the other hand, although governments have radically 
changed their character, certain functions have been relegated 
to them by common consent. Among these are protection 
against a common enemy, the maintenance of public order, the 
protection of individual rights, the enforcement of contracts, the 
administration of justice, the maintenance of public roads, canals, 
bridges, parks, museums, libraries and the enforcement of sanitary 
regulations. Nor is the reason for this difficult to understand. 
The administration of the army, navy, police, and the like, is pre- 
eminently the function of the state, because in such things effec- 
tiveness lies in the maximum aggregation of physical force, and 
this can be best obtained by all acting as one man under a single 
leader. Indeed the most perfect military force involves the 
maximum despotism and the minimum individuality, and hence 
can always be exercised most efficiently by arbitrary authority. 
The maintenance of public order, the enforcement of contracts, 
and the administration of law are also functions which can be 
best performed by the collectivity, for the reason that it acts 
uniformly for all, and its decisions are backed by the power of 



PUBLIC AND PRIVATE FUNCTIONS DEFINED. 317 

all. Nor does the development of individual character tend to 
transfer the functions of the soldier, the policeman, the judge, 
and the jailor from the authority of the state to that of the 
individual. On the contrary, while it tends to make these 
functions unnecessary, so long as they are needed they can be 
better performed by the state than by the individual. 

The same is true of public highways, such as roads, canals, 
bridges, sanitary regulations, etc. They are common conven- 
iences which everybody needs, and their management is of the 
simplest character. To keep such public conveniences in repair 
calls for no special skill, and changes in method are so slow and 
infrequent that no inconvenience is experienced by having them 
under control of routine authority. Although unlike military 
and police functions, these do not diminish but steadily increase 
with the advance of civilization, there is no tendency to put 
them under individual control. The reason for this is that while 
these can be managed as well by the state as by the individual, 
the former has the additional advantage of giving greater freedom 
to travel by obviating the inconvenience of direct payment in the 
form of tolls, etc. And since these functions relate only tON 
securing the maximum safety and convenience to individual 
enterprise and mobility, there is no incentive for individuals to 
undertake them because they have no interest in doing so. 

It may therefore be laid down as a general principle, that in 
proportion as social functions are complex, variable, and personal 
in their nature and interest, requiring instant decisions and 
expert skill, individual management is superior to state author- 
ity, and conversely, only in proportion as functions are simple, 
permanent, and arbitrary in their character, and impersonal in 
their nature and interest, can they be efficiently performed by 
the state. In other words, the functions of the state are 
essentially protective^ judiciary^ educational, and impersonal in their 
nature J hence, all economic and social functions which are 
QSStniidXly personal, productive, C07nmercial, or experimental \n their 
nature properly belong to the sphere of individual action and 
responsibility. 

3. This brings us to the consideration of the third proposition, 
namely, what line of public policy should be pursued in order to 
maximize the sphere of individual action and responsibility, and 



3l8 PROTECTION AND PATERNALISM, 

thereby minimize the necessity for governmental authority. The 
doctrine that the state should do for the individual only such 
things as he cannot do as well for himself, of course implies that 
it should continue to do ^// those things which it can, under exist- 
ing conditions, do better than he. Hence, it does not follow that 
because the natural functions of the state are protective, judiciary, 
educational, and impersonal, that it should never perform any 
others. On the contrary, the state must continue to do whatever 
the individual is incapable of doing as well. The state should re- 
linquish no functiofi until it can be performed as well or better by the 
individual ; otherwise 7?iany social duties would be abaitdoned alto- 
gether and progress greatly retarded. Paternalism in government is a 
necessary substitute for individual capacity, and consequently increases 
as we descend a?td dimijiishes as we ascend the scale of civiliza- 
tion. 

Therefore, whenever it is necessary for the state to perform 
paternal functions — doing for the individual, — it should always 
be regarded as a temporary duty, to be transferred to the indi- 
vidual as rapidly as he acquires the capacity to perform it. In 
the last analysis then, while it is the duty of the government to 
do those things for the individual which he cannot do as well 
for himself, th6 governing principle in public policy should 
ever be to protect and enlarge those OPPORTUNITIES, and 
to promote those influences which tend to develop the highest possibili- 
ties of the individual to do for hiinself. 

There is one other point worthy of note before passing to the 
application of this principle to the various phases of industrial 
and social life — namely, the importance of distinguishing between 
pater7ial and protective functions. This distinction is indeed in- 
dispensable to scientific statesmanship. To confound the pater- 
nal with the protective principle in government is to destroy all 
philosophic basis for a public policy, yet this is commonly done 
by many of the ablest writers. For instance, such writers as 
Senior, Spencer, and the leading English economists oppose 
state regulation of the hours of labor, the sanitary conditions of 
workshops, employment of women and children in mines and 
factories, compulsory education of factory children, and free 
public schools, as being paternal legislation. They thus fail to 
recognize any difference between the policy of furnishing the 



DISREPUTE OF ENGLISH ECONOMICS. 319 

child with wholesome sanitary surroundings and an education, 
and that of furnishing him with food, clothes, and shelter/ 

It is really this unphilosophic opposition to reform which has 
brought the doctrines of the English school into such disrepute 
among the more liberal and sympathetic portion of the commu- 
nity, and which in its reaction has given much plausibility to 
socialism. Indeed it has made individualism the synonym for 
anti-reform and its antithesis — socialism — the means of reform. 

Orthodox economists reason that because paternalism is in- 
jurious, protection should be abandoned pvhile, on the other hand, 
socialists conclude that because protection has been advanta- 
geous individualism should be abandoned and paternalism 
adopted. By overlooking the distinction between protection 
and paternalism, we are logically driven to one of two unscien- 
tific theories of statesmanship — laissez faire or socialism. 

The distinction between paternalism and protection is that a 
paternal policy implies doing the maximum for the individual, 
while a protective policy implies providing the individual with the 
maximum opportunity to do for himself. If this difference were 
clearly recognized the obvious error in the anti-reform atti- 
tude of let-aloneism and the stultifying influence of paternalism, 
would be obviated. The duty of the state as essentially pro- 
tective and educational in the widest sense of the term would 
be easily understood. With this as the basis of public policy, the 
state can always be scientifically used as a means of promoting 
progress without hindering the growth of individual freedom. 

1 This mistake is strikingly illustrated by Buckle in his able arraignment of 
what he calls the protective spirit in France as contrasted with the non-protective 
spirit in England. The truth is, however, that what Buckle was denouncing in 
France as protection, was paternalism. It was a reign of bureaucracy in which 
the state endeavored to do the maximum for the individual instead of enabling 
the individual to do the maximum for himself. The contrast was not between 
protection in France and laissez faire in England, but a contrast between pater- 
nalism in France and protection in England. See " History of Civilization," 
vol. i., chapters ix. and x. See also Spencer's "Coming Slavery," Popular 
Science Monthly, April, 1884. 



CHAPTER III. 
THE PRINCIPLE OF INTERNATIONAL TRADE. 

Section I. — hicreasing Social Opportunity Necessitates 
National Development. 

In the preceding discussion four facts have been established : 
(i) That social progress is development of the character and 
sovereignty of the individual, to which end government is but a 
means. (2) That the let-alone doctrine is theoretically unscien- 
tific and practically impossible in society ; a negative government 
being a contradiction in terms. (3) That since paternalism 
limits the need of the individual to do for himself, it hinders 
rather than helps the development of individuality. (4) That 
freedom can only be increased by the growth of individual 
capacity, which in turn depends upon the opportunities for de- 
veloping individual character. 

In order to apply these principles to the various phases of 
social and industrial life it is necessary at the outset to under- 
stand what constitutes opportunity. In the first place it should 
be remembered that we are dealing with man as a social being ; 
hence it is only with the development of his character as a social 
individuality that we are concerned. Indeed this constitutes all 
the difference between savagery and civilization. Opportunity 
then, is necessarily social, and must be sought in man's social 
environment — in his intercourse with his fellow-men. And since 
progress in society as elsewhere, is the movement from a rela- 
tively simple to a relatively complex state of existence, the social 
environment necessary to constitute opportunity must be con- 
stantly increasing in complexity. Social opportunity, therefore, 

320 



WHAT OPPORTUNITY IMPLIES. 32 1 

may be stated as necessary contact with an increasing variety of 
social influences.^ 

Society then, is a necessary prerequisite to individual advance- 
ment. Society does not mean merely an aggregation of human 
beings, but such an association of individuals as shall make fre- 
quent intercourse and mutual dependence between them certain. 
This implies the segregation of the human race into groups or 
nations in which the individuals have some industrial, social, and 
political affinity, without which the contact necessary to individual 
growth is impossible. Consequently the doctrine of increasing 
opportunity for individual development includes not only the re- 
lation of individuals to each other within a social group or nation, 
but also the development of the nation as a political entity. 
Although patriotism and the desire for national autonomy is a 
prominent feature in the statesmanship of every country, there is 
no recognized principle by which its policy should be governed. 
What relation the industrial development of the nation sustains 
to the civilization and freedom of the people ; why, and under 
what conditions national and industrial autonomy is necessary to 
industrial development, and what relation industrial and indi- 
vidual development sustain to each other, are questions to which 
neither economic nor political science has hitherto furnished any 
adequate answer. When we recognize the fact however, that a 
nation is but the social setting of the individual and that gov- 
ernment is but a means by which the resources of the nation are 
utilized for promoting the welfare of the individual, the im- 
portance of considering the development of the nation as a 
necessary means for promoting the progress of society at once 
becomes apparent. 

Section II. — National D eve lopme^it Necessitates the Growth 
of Manufacturing Industries. 

In considering this question it is important at the outset clearly 
to understand what we mean by the expression, national develop- 
ment. It is commonly assumed that the development of the 
material resources of a country, as agriculture, mining, or manu- 
facture, is necessarily the development of the nation. This view 
confounds the physical qualities of soil and climate with the 

^ ** Wealth and Progress," pp. 231, 232. 
21 



322 THE NA TlON IS SOCIAL. 

social qualities of the people which are essentially different. 
Such reasoning logically makes the industrial pursuits, and hence 
the social life, of the people depend upon the physical character- 
istics of the country. Thus instead of subordinating nature to 
man it subordinates man to nature, which is the reverse of all 
progressive tendencies in social evolution. When we separate 
physical from social phenomena and recognize the nation as the 
people this difficulty is obviated ; it then becomes evident that 
the social development of man is an end to which the physical 
development of nature is but the means. 

In considering the development of a nation therefore, the 
prime question is not development of the natural resources of 
the country, but development of the character of its people. 
The mere fact that the soil of a country is prolific is not a suffi- 
cient reason why all the people should become agriculturists. 
The cultivation of the soil or of any material resource of a 
country should be made subordinate to the cultivation of man. 
In other words, the development of a nation consists in the 
development of its civilizing and individualizing influences. To 
the extent that the people of a nation are isolated in their occu- 
pations and daily life, will their social progress be slow ; and the 
less frequent intercourse between individuals the less social- 
izing will its influences be. In order then, to increase the 
socializing influences of a nation, it is necessary first of all to 
promote the concentration of its population. Nor can this be 
accomplished by mere arbitrary authority. People will not con- 
centrate either in their social life or industrial pursuits merely 
because they are advised or ordered to do so. The concentration 
of population means greater complexity of social life, which is 
what man is apt to avoid except under the pressure of some 
desire or necessity. 

It is proverbial that the savage shrinks from the customs of 
civilization, and the rural peasant from contact with city life. 
Indeed, people whose social life is simple, always endeavor to 
avoid close intercourse with those in highly developed society, 
because it means new and at first, embarrassing experiences. 
Nothing will induce people to encounter the difficulties of a new 
environment but the strong desire for some object not otherwise 
obtainable. So long as people can gratify their desires without 



IMPORTANCE OF CITIES. 323 

facing the difficulties of new and more complex social relations, 
they will continue to do so. Nothing will permanently centralize 
a people which does not make concentration indispensable to 
getting a living. Thus social concentration depends upon indus- 
trial concentration. The possibility of concentrating employ- 
ments depends upon the nature of the industry. Agricultural 
occupations cannot possibly be centralized ; they are isolating 
in their very nature, and hence are essentially non-socializing 
in their influence. The only industries which tend to centralize 
and socialize people are manufacturing. Social isolation is as 
impossible with manufacture as is social concentration with 
agriculture. The development of manufacturing industries then, 
is an indispensable condition to national development and social 
progress. 

The development of manufacturing industries is important in 
many respects. In the first place because it involves socializing 
occupations. Factory methods of production bring people into 
close social contact in the ordinary pursuits of industrial life. 
Whatever compels people to work together, makes their living 
in close proximity indispensable ; the modern city and all that it 
implies is chiefly the product of these two facts. From time 
immemorial the growth of manufacture and trade has been the 
means of developing towns and cities,' and these industrial 
centres have in turn ever been the nurseries of civilization. It is 
always in the cities that the most complex social environment arises, 
and it is always there that the greatest refinement and highest 
individuality exists, and hence it is there that the successful 
struggles for social, religious, and political freedom have always 
taken place. 

The difference therefore, between agricultural and manufac- 
turing employments is very marked. Agriculture is essentially 
isolating and non-socializing as an occupation, and its products 
relate almost exclusively to physical wants. Hence it does 
practically nothing either to create or supply the social wants 
and life of man. Manufacture, on the contrary, relates almost 
exclusively to the civilizing and refining side of man's character. 
The supply of clothing, furniture, the development of archi- 
tecture, music, literature, art, and every thing above the mere 
' Witness the free cities of the Middle Ages. 



324 ECONOMIC OPPORTUNITY. 

physical needs of the savage, is directly or indirectly the result 
of manufacture and its socializing influence. These things are 
not only necessitated by man's higher social wants, but are 
largely consumed as the result of his social relations. Since 
manufacturing industries tend both to create a socializing en- 
vironment and to supply the social wants resulting therefrom, 
they are doubly indispensable to national development. 

Section III. — Necessary Conditio7is to the Development of 
Manufacture. 
In discussing the economic and social wisdom of any public 
policy, the two important questions to consider are : (i) What is 
the end we desire to promote ? (2) What means will most surely 
promote that end ? 

1. It may be safely assumed that the desired end, to the promo- 
tion of which statesmanship should be devoted and public policy 
directed, is the material and social progress of the people. We 
have already seen that this involves the development of the nation 
as a political entity, and also that national development necessi- 
tates social concentration and industrial diversification, which in 
turn depend upon the growth of manufacturing industries. The 
immediate question, therefore, for the practical statesman to 
consider is, what will best promote the development of manufac- 
turing industries. Whatever will promote this end will justify 
the means necessary to its adoption. The question to ask is not 
what will it cost ? but will It do it? 

2. It is a universal law in nature and society that growth 
depends upon opportunity. As already explained, opportunity 
is not to be interpreted as mere passive possibility, but as actual 
inducement. In nature opportunity for growth means the exist- 
ence of conditions and influences which make it easier to grow 
than not to grow. In society, it is contact with positive social 
influences which make refinement, knowledge, and general culture 
easier and more advantageous than ignorance and crudeness ; 
and in economics it is the existence of conditions which make it 
more profitable to do than not to do. Opportunity for the 
development of manufacturing industries therefore, means the 
existence of conditions which make manufacture not only physi- 
cally possible but economically profitable. 



NEED OF A HOME MARKET. 325 

Obviously the first condition necessary to the growth of any 
industry is a market for its products. Now an economic market 
evidently cannot be made by mere fiat of government because it 
depends on the habits and social life of a people. But it can be 
preserved by protecting home industry in manufacturers to a cer- 
tain extent. How far? Why just so far as is necessary to prevent 
home products from being undersold by the products of lower 
paid laborers in other countries. This then is the sober rule and 
principle of protection as ministering to human welfare. The 
industries of a counfj-y should be protected to the full amount of the 
difference between the wage-level of that nation and the nations beloiv 
it in average civilization using similar methods and no further^ since 
thus the 77iaintenance of its place in civilization is secured. A restric- 
tive policy can be justified only on the ground that it will promote 
greater social advancement than would otherwise occur. Nothing 
can justify the restriction of freedom except a demonstration that 
it will ultimately promote more freedom. Will the protection of 
the home market increase the opportunities for developing social- 
izing industries ? This is the immediate question to consider 
and it involves a number of most important questions, which will 
be taken up in their order as follows : (i) The economic and 
social superiority of the home market over the foreign ; (2) the 
economic basis of international competition ; (3) the relation of 
cost of production to international value ; (4) the effect of a 
tariff upon the price of home products ; (5) the relation of tariffs 
to wages in non-protected industries ; (6) the influence of pro- 
tection in the most advanced countries upon the progress of less 
civilized countries. 

« 
Section IV. — The Economic and Social Superiority of a 

Home Market over a Foreign. 

There are three important reasons why home markets are supe- 
rior to foreign markets, and why domestic trade and manufacture 
should always be encouraged in preference to foreign: (i) Because 
foreign trade is essentially wasteful ; (2) because foreign mar- 
kets tend to enable employers to permanently profit by low 
wages ; (3) because home markets most surely promote the 
diversification of industry and social progress. 



326 FOREIGN TRADE WASTEFUL. 

I. Foreign trade is essentially wasteful because it necessarily 
tends to maximize instead of minimizing the distance between the 
raw material and the factory, and between the factory and the 
market. For instance, before the development of cotton manu- 
facture in this country, our cotton cloth was made in England. 
The raw cotton was produced in South Carolina, sent to England 
to be manufactured, then brought back to America. The con- 
sumer of cotton cloth in this country had to pay the cost of 
transporting it twice across the Atlantic, which was so much waste 
made necessary by uneconomic conditions. To carry a product 
six thousand miles in order to deliver it to consumers a hundred 
miles away is to perpetuate the most costly way of doing. 

Nothing can justify such waste except absolute inability to 
avoid it. The mere fact that England could, under existing con- 
ditions, do the manufacturing at so much less cost than we, as to 
be able to pay the transportation both ways, was no economic 
justification for our continuing to buy cotton cloth of her, instead 
of developing the methods for making it ourselves. Indeed such 
a policy would have been as obviously uneconomic as to have per- 
sisted in using the hand-loom and stage-coach in preference to 
the factory and railroad. The question in that case was not, can 
England, under existing conditions, supply our cotton cloth 
cheaper than we can make it ? but can we, by any change of 
conditions, develop the means of making it as cheaply for our- 
selves as she can make it for us, and thus eliminate for all time 
the unnecessary cost of double transportation ? This question 
was answered in the affirmative, and to-day cotton cloth can be 
made a's cheaply here as in England, and more cheaply than in 
any other country, notwithstanding our wages are so much higher. 
Consequently that economic waste is saved not only to us, but to 
all future generations, to say nothing of the social advantage of 
developing the industry in our own country. 

It may be laid down as a fundamental principle in economic 
production that all commodities should be manufactured as 
near as possible to the raw material, or the market for finished 
products. If a nation possesses the raw material for a given 
article, it should always develop the facilities for manufacturing 
the finished product for its own consumption ; and any public 
policy which does not tend to promote this end is inimical to 



FOREIGN MARKETS AND HOME WAGES. 32/ 

national development. Therefore, instead of constantly en- 
couraging foreign trade, it should ever be a cardinal principle in 
statesmanship to develop domestic trade and home manufacture. 

2. Another disadvantage of foreign as compared with home 
markets is, that they divorce the economic interest of the em- 
ployer and the employed. To the extent that the producers in 
any community rely upon a foreign market for their wares, the 
employers cease to have any economic interest in the welfare of 
their own laborers. Whenever the employer is independent of 
the laborers of his own country as consumers, he has an apparent 
interest in keeping down wages, because, under those circum- 
stances, every reduction of wages is an increase of profits. Sup- 
pose, for instance, an American shoe manufacturer sells all his 
product in Europe at a dollar a pair ; it is quite obvious that if 
he can obtain his labor at 10 per cent, less, it would be so m.uch 
addition to his net profit, because the reduction of wages would 
in no way affect the consumption of his shoes, they being sold in 
another country where wages remain the same. 

Under a home-market regime the case is very different, be- 
cause in domestic trade there are no influences that militate 
against the material welfare of the laborers which do not react 
upon that of the employing class. The obvious reason for this 
is that no market for factory-made products can be permanently 
sustained without consumption by the laboring classes. Conse- 
quently when the employing class in any country have to rely on 
a home market for the sale of their products, their own prosperity 
depends directly upon the consuming capacity, and hence the 
wages, of the laboring classes in their own country. Under such 
conditions, whatever reduces wages and impairs the purchas- 
ing power of the laborer diminishes the market and undermines 
the prosperity of the employer. Thus, under a home-market 
regime, the employer's success is dependent upon and commen- 
surate with the prosperity of the laboring classes, because their 
consumption determines the market basis for his production. 
But the days of foreign markets, as the chief support of highly 
developed manufacturing industries in any country, are doomed. 
Frequency of travel and familiar intercourse between the most 
civilized nations tend to make exclusive knowledge of productive 
methods practically impossible. Hence, as fast as nations be- 



328 A NATION IS RICH BY WHAT IT USES. 

come consumers of manufactured products, they begin to make 
them for themselves, and to use the improved methods developed 
by their most advanced neighbors. Thus the tendency of civili- 
zation is to make the industries of all countries depend more and 
more upon home consumption. The economics of the future 
must be the economics of large production, home-market, and 
high wages, which are the only industrial conditions compatible 
with social freedom and political democracy. 

3. The third and by no means the least important reason why 
home markets are preferable to foreign markets is, that they more 
surely promote the diversification of production and the sociali- 
zation of employments. One of the popular notions regarding 
foreign trade is that the prosperity of a nation is indicated by the 
amount of its exports, that it is rich by what it sells. This is a 
great mistake. Nothing indicates the prosperity and well-being 
of a people but what they consume. A nation may produce ex- 
tensively and export largely and the mass of its people remain 
very poor. To the extent that more manufactured products are 
exported from any country than imported to it, are its products 
not consumed by those who produce them. The prosperity of a 
nation therefore, cannot be measured by the wealth it exports to 
other countries, nor by the wealth it receives through the profits 
of foreign trade, but only by the wealth its own people consume, 
since that is all which really enters into their social life. Thus the 
extent of domestic consumption — the home market — is the real 
measure of the social status. 

Moreover, a home market supplies a double social current, 
whereas a foreign market for the same products only supplies a 
single current. In addition to the socializing effect of manufac- 
ture upon industry, the home use of manufactured articles tends 
to increase and diversify the market for such products by the 
social conditions necessarily connected with their consumption. 

For instance, the consumption of carpets, pictures, music, 
millinery, etc., imply more or less refined social relations, which 
stimulate not only the desire for more of the same kind of things, 
but also create tastes and desires for fresh varieties of products. 
Thus, while manufacturing industries always socialize, their so- 
cializing influence is necessarily the greatest where they produce 
for a home market. This must not be interpreted to mean that 



TEST OF ECONOMIC CHEAPNESS. 329 

foreign markets are a disadvantage under all conditions, but only 
tliat wherever the development of a home market is possible it is 
always preferable to a foreign market. In other words, foreign 
trade is ultimately an economic disadvantage to a nation unless 
it can take place without substituting simpler for relatively com- 
plex industries or lowering wages, and should be encouraged 
under no other conditions. 

Section V. — The Economic Basis of International Compe- 

tition. 

Competition is regarded as essential to industry, because it pro- 
motes economy in the production of wealth both by developing the 
highest capacity in the producers and by reducing prices, thus 
giving the community the advantage of the highest skill and the 
best productive methods. This unexceptionable proposition 
has the advantage of being one of the most uniformly accepted 
postulates in economic science. Here then we have a point of 
common agreement, namely, that no competition can promote 
industrial well-being which does not tend to make wealth cheap. 
(Neither a free trade nor a protective policy therefore can be 
economically justified, except as it squares with this proposi- 
tion.) 

In order to apply this test to public policy, however, it is 
necessary to understand clearly what constitutes cheap wealth, 
and how to determine accurately when commodities are cheap 
or dear. Commodities are said to be dearer as their value 
rises, and cheaper as their value falls ; but the terms dearer and 
cheaper have no meaning except as they indicate that the articles 
referred to have become more or less difficult for man to obtain. 
Wheat cannot be either cheap or dear to potatoes or gold, any 
more than Easter bonnets can be cheap or dear to fishes. The 
value of wheat may be high or low as compared with that of 
potatoes or gold, but value cannot be high or low to those 
articles ; it can be high or low only to man. Nor is the value of 
an article high or low to man because it will exchange for a larger 
or smaller quantity of gold or other commodities, but solely be- 
cause it will exchange for a larger or smaller quantity of his 
labor. In short, the terms value, price, exchange, dearness, and 



330 CHINESE AND AMERICAN PRICES. 

cheapness have absolutely no meaning, and convey no idea 
except in relation to man. 

From this point of view the importance of economic movement 
does not turn upon the relation of one kind of wealth to another, 
but depends upon the relation of all kinds of wealth to man. 
Wealth is not necessarily cheap or dear according as it will ex- 
change for a large or small amount of gold, but only as it will 
exchange for a large or small amount of labor. That is to say, 
no matter what the ratio of exchange between different com- 
modities or between all commodities and gold may be, they are 
cheap or dear only in proportion as a large or small amount can 
be obtained for a day's service. 

It may be said that the ratio in which commodities exchange 
for gold always indicates the ratio in which they will exchange 
for labor ; that is to say, the gold-price always indicates the 
labor-price. This may be true to a limited extent within any 
given country, but it is almost never true as between different 
countries. Take, for example, this country and China ; suppose 
shoes of a given quality were two dollars a pair in this country 
and they were only fifty cents a pair in China, manifestly the 
amount of gold necessary to obtain a pair of shoes in America 
would purchase four pairs in China. Thus according to the 
gold standard of measurement shoes in America would be three 
hundred per cent, dearer than those in China, which is precisely 
what the current doctrine teaches us to believe. Consequently it 
is laid down as a self-evident proposition, that any discrimina- 
tion which would prevent the shoes of China from entering the 
market of America at less than two dollars a pair would make 
the shoes of the American consumer dearer by three hundred 
per cent.; therefore, the true economic policy is to have free 
trade between America and China, and thus enable the American 
citizen to have cheap shoes. 

If we examine such a transaction from the standpoint of man 
instead of gold, the utter fallacy of such a position will at once 
be apparent. To be sure the shoes in America cost two dollars 
a pair, but as the American mechanic receives two dollars a day 
he can obtain a pair of shoes for a day's labor, while in China, 
although the shoes cost bat fifty cents a pair, the laborer receiv- 
ing less than ten cents a day must work fully five days to obtain 



CHEAP LABOR-PRICES ARE HIGH, 33 1 

a pair of shoes. Thus while measured in gold, the shoes in 
America cost four times as much as those in China ; measured in 
labor, the Chinese shoes are four hundred per cent dearer than 
the American. Manifestly the two-dollar American shoes are 
cheaper for Americans than the fifty-cent Chinese shoes are for 
Chinamen. Professors Sumner and Perry would probably reply 
yes, but Chinese shoes would be cheaper for Americans than 
American shoes are, because we could get four pairs of Chinese 
shoes for the amount of service we now give for one pair. It is, 
they would add, just because the Chinese can make shoes for 
Americans cheaper than Americans can make them for them- 
selves, that we want free trade in order that we may obtain our 
shoes from those who can make them cheapest. Why should we 
give the shoemakers of Lynn or Marblehead two dollars for what 
we can buy from those of Pekin or Hong Kong for one dollar ? 

This argument has a very satisfactory seeming, but it has the 
disadvantage of failing to reckon with the facts. Like the 
Ricardian theory that " profits can only rise as wages fall," it 
would be true provided the assumption upon which it is based 
were correct — namely, that every thing else remains the same. 
Of course the American consumer would receive a net gain by 
purchasing his shoes from China at fifty cents a pair, instead of 
paying two dollars in America, if wages and other conditions 
remained the same, which would be an impossibility. It would 
be just as rational to say that ' other things remaining the same,' 
a brick will not sink to the bottom of a bucket of water. It is 
precisely because no two particles of the water remain the same 
that the brick sinks ; the disturbance caused by introducing the 
brick makes a readjustment of every drop of water necessary. 

The same is true in the case before us. The introduction of 
Chinese shoes into the American market would not merely give 
the two-dollar American laborer one dollar shoes, but to the 
extent that it operated, would make it a general industrial dis- 
turbance and therefore cause a readjustment of economic rela- 
tions. As already stated, whatever undersells succeeds, and 
whatever succeeds becomes permanent, and whatever becomes 
permanent establishes the methods by which its success is 
accomplished. Therefore if the shoemakers of China could 
undersell the shoemakers of America in the American market. 



332 READJUSTMENT ON A LOWER PLANE. 

they would necessarily succeed in obtaining the custom of Amer- 
ican consumers. If this caused no other change than to reduce 
the price of shoes in this country, the case would be very simple, 
and the logic of the laissez-faire economist would be conclusive ; 
but this is not the case. On the contrary, it would make an 
entire rearrangement of industrial conditions necessary, at least 
so far as the 200,000 of American shoemakers are concerned. 

As soon as American consumers begin to buy shoes from 
China several forces will begin to operate, which will tend to 
revolutionize and ultimately readjust economic relations. The 
American manufacturer will endeavor to compete with the China- 
man in the American market, to do which he will be compelled 
to reduce the cost of producing shoes here at least to the level of 
the cost of production in China, together with the cost of trans- 
portation. This could only be accomplished in one of two ways, 
either by using superior labor-saving machinery or by reducing 
wages equal to the difference. The improved machinery could 
not be adopted for any such reason, because nothing has oc- 
curred to increase the market sufficiently to make its profitable 
employment possible. 

A slight increase in the consumption of shoes might result 
from lowering the price, but that would soon be more than offset 
by the reduced consumption among the discharged laborers. 
Hence it is manifest that such a change could do practically noth- 
ing to create the better machinery necessary to make a differ- 
ence in the cost of production. The only other alternative would 
be to reduce the wages of shoemakers here to substantially the 
same level as those in China. And this would not be limited to 
the men who simply manufacture the shoes, it must also apply to 
all those who produce the raw materials and tools used in making 
shoes. When this reduction occurs, all the cheapness of the 
imported shoes disappears, because the capacity of American la- 
borers to purchase shoes is reduced exactly as much as the price 
of the shoes has fallen. If wages are not reduced, then the China- 
man would produce the shoes and the American shoemaker would 
be forced into idleness, unless he emigrates to China, in which case 
he would have to work on the same terms as the Chinaman. 

Nor is there any warrant for assuming that the discharged 
laborer will find another occupation. Nothing will create em- 



LOW WAGES NEVER CHEAPEN WEALTH. 333 

ployments except a market for products. Since nothing has 
occurred in this instance to create either a demand for new 
commodities or increase the consumption of existing ones, we 
have no more right to assume that the discharged laborers could 
find new occupations than we have to assume that they could 
live in luxury without employment. Thus in the last analysis 
the shoes would either have to be made in China or in America 
by Chinese methods ; and in either case, American wages would 
be adjusted to Chinese prices. Consequently, instead of the low- 
priced products from China giving us cheap wealth in America, it 
would serve only to give us cheap labor and a lower civilization. 

It may be regarded as an economic axiom that nothing can perma- 
nently cheapen wealth which does not reduce the price of comjnodities 
relatively to wages ^ and this can 7iever be accomplished by substitiUing 
cheaper for dearer labor ^ either at home or abroad. 

Nor is this all. Not only is it true that the low-priced shoes 
of China would not be permanently cheaper to anybody than 
the high-priced shoes of America, but to permit the products of 
the low-paid laborers of x\sia to undersell those of the high-paid 
laborers of America, would be to prevent the growth of the only 
influences which can make wealth permanently cheaper in the 
future. Just in proportion as the high-paid labor of one country 
is superseded by the low-paid labor of another, is the simpler so- 
cial life and small consumption of the former substituted for the 
more complex social life and larger consumption of the latter. 
This check in the demand for an increasing variety of products 
necessarily prevents the diversification of industry and the de- 
velopment of manufacture, and consequently lessens the incentive 
for the concentration of capital, the use of steam-driven machinery, 
and all wealth-cheapening methods of production ; and thus not 
only fails to furnish cheap wealth for the present, but prevents 
the possibility of cheaper wealth in the future. It is manifest, 
therefore, that from a philosophic view of the case any public 
policy which aids or permits the products of the low-paid labor 
of one country to undersell the products of the high-paid labor 
of another, tends to arrest human progress by stereotyping lower 
civilization and preventing the growth of a higher. 

Whenever a struggle for industrial supremacy takes place 
between producers in countries of differing degrees of civiliza- 



334 UNECONOMIC COMPETITION. 

tion/ one of two things must necessarily occur : either the higher 
must descend to the plane of the lower, or the lower must ascend 
to the plane of the higher. If the higher-paid producer descends 
to the plane of the lower, it will not be economic competition, 
because in that case the low-wage products will be sure to undersell 
the high-wage products, and thus enable the inferior to succeed 
against the superior. In such a struggle there is nothing to de- 1 
velop the best in the higher, but every thing to repress it. The 
cheap-labor competitor does not succeed through his economic 
superiority, but solely because of his social inferiority. Such a 
contest, therefore, is contrary to all conditions of economic com- 
petition.'^ Instead of being a contest between approximately 
equal competing units which tends to develop the best in both, it 
is an unequal struggle in which the inferior is sure to prevail 
against the superior. 

When competition takes place on the plane of the higher 
wage-level, the result is very different. In such a contest, who- 
ever succeeds is compelled to do so by employing superior ma- 
chinery, and that reduces the cost of wealth by saving instead of 
cheapening human labor. Every effort of the lower to succeed 
against the higher by such means necessarily tends to develop 
better methods of production, cheapen wealth and promote 
social progress in the less advanced country ,~ even if it fails to 
undersell competitors in a foreign market. On the other hand, 
in every such struggle the high-wage producer is compelled 
to make efforts to still further develop the wealth-cheapening 
methods in the most advanced countries. Therefore the con- 
test on the higher plane is supremely economic, because it 
stimulates the best in both competitors, guarantees that only 
the superior shall succeed, and in so doing helps rather than 
injures the inferior. 

This is precisely what takes place in every other sphere of de- 
velopment. Evolution is a constant differentiation and higher 
integration with an ever increasing complexity of relations. So- 
cial progress constantly tends toward a greater variety of relations, 

^ The most infallible test of a relatively high or low state of civilization in any 
country is the material or social conditions of the masses, v^^hich is always indi- 
cated by the raTte of real wages. 

^ See definition of economic competition, p. 293. 



BASIS OF ECONOMIC COMPETITION.- 335 

specialization of functions, and integration into larger but more 
diversified aggregates ; witness the tendency towards larger and 
larger cities and nations, through which greater freedom and 
more complex and socializing intercourse is steadily devel- 
oped. In all this progressive tendency each integration takes 
place by the lower rising to the plane of the higher, and never by 
the higher descending to that of the lower. And this progress 
can only take place by the lower becoming approximately equal 
to the higher. For instance, if one wants to move in a social 
class more cultured than the one to which he belongs, he can do 
so only by becoming more cultured himsslf. The more refined 
will neither take on coarser manners nor tolerate the a in another 
for the sake of his society. Indeed, were it otherwise, progress 
would be impossible ; because if the higher would descend to the 
lower, there would be no incentive for the lower to rise. 

Since nothing can cheapen wealth which does not reduce the 
cost of production without diminishing real wages, and since no 
industrial contest can be economically competitive which does 
not take place between approximately equal competing units, and 
since there can be no approximate economic equality between 
contestants except on the plane of the higher, it follows that 
the true economic basis for international competition is the wage-level 
of the dearer-labor country. In order therefore to apply the doc- 
trine of opportunity laid down in the previous chapter, and to 
establish international trade upon a strictly economic basis, it is 
necessary for the higher-wage country to discriminate against the 
products of the lower-wage producer to the full extent that the 
lower wages affect the cost of production, as this determines the 
competitive status of the commodity. Thus we have a truly 
economic basis for a tariff policy that shall be pj'otective without 
being paternal. A tariff policy based upon this principle would 
protect the superior against injury from the inferior, without 
affording the slightest monopolistic impediment to economic 
rivalry. Instead of restricting wholesome competition, this would 
simply protect the competitive opportunity for the *' fittest to 
survive," the test of fitness always being the ability to furnish low- 
priced wealth without employing low-priced labor. Under such 
conditions the products of foreign countries could never under- 
sell those of home industry, except when the lower price of the 



336 SUPERFICIAL REASONING, 

foreign product is due to the use of superior Xd^^ox-saving and not 
to \d.hoT-cheapemng methods. Consequently whoever undersells 
confers a permanent advantage on the whole community. 

Section VI. — Some Popular Fallacies Considered, 

It is a standing charge against the protective doctrine that it 
has no definable scientific basis, that it is grounded upon no 
general principle in nature, society, or economics. Nor is this 
charge wholly unwarranted when judged by the accepted reason- 
ing on the subject. It is a peculiar feature of the history of 
tariff legislation that it has been generally advocated for local or 
special reasons, and almost never based upon any economic 
principle susceptible of general application. In this country, 
where the protective idea has reached its highest development, 
the tariff advocate rests his claim almost entirely upon the fact 
that we have made marked industrial progress under a protective 
regime. He compares the wages and social condition of the 
laborers in high-tariff America with those of the laborers in free- 
trade England, and confidently exclaims : " Behold the superiority 
of a high-tariff policy ! " And, with equal assurance, he ascribes 
the poverty and social degradation of Ireland and India to the 
fact that British rule has prevented them from having a protective 
tariff. On the other hand, while the free-trader objects to this 
kind of reasoning by the protectionist as confounding coincidence 
with cause, he employs it with equal assurance in presenting his 
own case. Studiously confining his observation to European 
conditions, he compares the wages and social condition of labor- 
ers in England under free trade with those in continental countries 
under protection, but not with those in America, and triumphantly 
exclaims : '^ Behold the superiority of free trade ! " 

By this mode of reasoning the English free-trader is as unable 
to explain why wages are higher in America under protection 
than in England under free trade, as is the American protectionist 
to explain why they are higher in England with free trade than 
in continental and Asiatic countries under protection. If the 
mere fact that prosperity accompanied free trade in England 
justifies the reasoning of the free-trader, then the fact that pros- 
perity accompanies a high tariff in America equally justifies the 
reasoning of the protectionist. And when the free-trader declares, 



LAW OF ECONOMIC PROTECTION. 33/ 

as he does, that America is not prosperous by virtue of the tariff, 
but in spite of it, the protectionist can with equal force reply that 
England is not prosperous by virtue of her free trade, but in spite 
of it. This line of reasoning furnishes no scientific means of 
testing the merits of either doctrine ; it shows that progress is 
possible under both policies, but it affords no logical basis for 
the application of either. What these facts show is, that neither 
free trade in England nor protection in America prevented the 
growth of industrial prosperity in those countries, but they do 
nothing to prove that this progress was promoted by either policy. 

Free trade being simply the absence of protection, it follows 
that to discover the law of economic protection is to discover 
that of free-trade also, and since neither free trade nor protec- 
tion will produce the best economic effects under all conditions, 
it is only by the knowledge of such a law that any philosophic 
application of either policy is possible. If the conclusions 
reached in the preceding sections are correct, however, this law 
is already established, and we have a universal principle upon 
which a protective and consequently a free trade policy can be 
scientifically adopted. Briefly stated this law is : (i) that compe- 
tition can be econofnic only when it takes place between approximately 
equal competitors J (2) that when there is 'any niai'ked difference in 
the wage-level of the international competitors, siLch approximate 
competitive equality is possible only when the competition is based upon 
the higher wage-level of the higher j (3) that no lowering of prices 
can cheapen wealth which does not result from diminishing the cost of 
production without lowef^ng wages. 

Bearing these propositions in mind, we shall have no difficulty 
in seeing why a protective policy might promote industrial pros- 
perity and social progress in America, and have the reverse effect 
in Austria, India, and Ireland. Nor will it be difficult to under- 
stand why America has more to fear from free trade with highly 
civilized England than with the less civilized nations of Asia and 
South America. And it will be equally clear why a tariff policy 
will not produce the same effect with a high-wage level in a small 
colony like Victoria with a million inhabitants, as in a large 
country like the United States, with sixty-five million of people.^ 

^ See articles in The Nineteenth Century for September, 1888, and Qua?'terly 
Journal of Econo?nics, October, 1888. 
22 



338 INFANT-INDUSTRY THEORY, 

One of the arguments much relied upon by protectionists is 
that known as the " infant-industry argument." The burden of 
this argument is that industries should be protected in their early 
stages to prevent them from being killed by competition before 
they are fully established, the implication being that when they 
become well established they will be able to hold their own 
against the world. For a time this idea was reluctantly accepted 
by anti-tariff people, but now that after having had protection for 
half a century and on the plea of '' infant industries," a tariff is 
still demanded, the free-traders naturally ask " when do industries 
reach maturity ? " They regard such reasoning as far more in- 
fantile than the industry, and insist that if there is any virtue in 
the protective principle, it should be applied in behalf of the 
weak against the strong and not in behalf of the strong against 
the weak. Consequently, if protection can be justified at all, it 
is such countries as Russia, Turkey, Italy, Spain and the in- 
dustrially weak countries of South America that need protection 
against the United States, and not the United States against 
them. 

If the principle here laid down had been recognized, the 
obvious fallacy in both these positions would have been appa- 
rent ; and the talk about " infant industries " would never have 
been indulged in by the protectionist, and the free-trader's re- 
joinder about protecting the lower against the higher would have 
been too absurd for utterance. It would then have been seen 
that the products of America do not need protection against 
those of England because the industries are younger, but be- 
cause they are made under a higher civilization — a civilization 
in which the human element in production is more expensive. 
Hence, to permit the products of America to be undersold by 
those of another country, the lower cost of which results entirely 
from the use of lower-paid labor, would neither give cheaper 
wealth nor better social conditions. It would also have been 
clear that this fact in no wise changes with age, unless either the 
wage-level of the lower-wage coun^try rises, or the use of labor- 
saving appliances in the higher-wage country more than overcomes 
the difference. Unless one of these things occurs protection will 
be as necessary at the end of a thousand years as it was the first 
six months, although both countries may have greatly advanced. 



THE HIGHER REQUIRES PROTECTION. 339 

Indeed, the greater the advancement in both countries the 
greater will be the probability of their employing similar ma- 
chinery, thus making the necessity of protection depend entirely^ 
upon the difference in their respective wage-levels, as is the case 
with America and England to-day. Therefore, when the tariff 
advocate asks for protection simply because the industry is 
young, and the free-trader opposes it on the assumption that the 
producers in a superior civilization ought to be able to eco- 
nomically compete with those in an inferior civilization, they 
both mistake the true economic gist of the problem. Social 
superiority, instead of making protection unnecessary, is the very 
thing whigh makes it necessary, provided it is socially important 
to retain or further develop the industry. 

Nor is this peculiar to industry ; it is a general principle 
throughout society. In every phase of human relations, it is the 
higher that needs protection against the lower, and this because 
the latter will resort to methcTds of aggression and defence which 
the former cannot, for social or ethical reasons, afford to em- 
ploy. Take, for example, the criminal laws. They are enacted 
to restrain the morally lower from injuring the higher ; it is to 
prevent the dishonest from plundering the honest, the ma- 
licious from assaulting the well-intentioned, that police courts and 
jails are instituted and armies maintained. Indeed, there is not 
a restrictive institution maintained in society which was not 
called into existence to protect the higher from the injurious 
effects of the lower. 

It may be asked, if this theory is correct, why does not the 
American producer need a much higher tariff against the prod- 
ucts of China, Russia, or South America than he does against 
those of England, since her wage-level much more nearly ap- 
proximates to his own ? The reason for this is very simple. It 
is because the social chasm between America and those coun- 
tries is so great, that the use of labor-saving appliances here 
more than makes up for the difference in the cost of labor in the 
respective countries. In China, for instance, where almost every 
thing is made by hand labor, the product per capita is so small, 
compared with what can* be turned off by steam-driven machin- 
ery here, that it costs more to produce an article there with labor 
at 6 cents a day than it does here with labor at two dollars a day. 



340 INDIA, IRELAND, AND RUSSIA. 

But if the labor-saving machinery of America were introduced 
into China, and operated by their six-cent-a-day laborers, then an 
immensely high tariff would be necessary in order to protect the 
high wage-level of America, because, in that case, while all other 
items of cost would be the same, the human element in the pro- 
ductive process would be many hundred per cent, dearer here 
than there. This is why England is a more dangerous com- 
petitor to us than China. True, the wage-levels of America and 
England are more nearly alike than are those of America and 
China, but the machinery of America and England is still more 
so. Indeed, it is because the machinery used in America and 
England is practically the same, that all the difference in their 
respective wage-levels is directly expressed in the relative com- 
petitive power of the two countries. What is true of England is 
equally true of France, Germany, and every other country, to the 
extent that they use similar machinery but cheaper labor than 
we do ; yet they may have very much cheaper labor, and still be 
practically harmless as economic competitors, so long as they 
use poorer machinery or hand methods. 

Another error into which tariff advocates commonly fall, is in 
thinking that India, Ireland, or Russia would greatly improve 
their condition if they imposed a tariff against British products. 
Indeed, there are not a few Englishmen to-day who entertain a 
similar notion, and insist that England would be greatly benefited 
by adopting a tariff policy towards America. This is a mistake, 
for America's wage-level being higher than England's, we could 
not undersell her except by the use of superior methods, which 
either English producers would be forced to adopt or let Ameri- 
can producers do the work, and in either case English laborers 
would have a net gain. If the better methods were adopted in 
England, she would have cheaper products without lower wages, 
which would be equal to a rise of wages. If America made the 
products, the English laborer could emigrate to America and 
obtain American wages. 

The same is true with regard to England and continental 
countries. Competition between England and Russia would not 
injure Russia, because there are no economic methods employed 
in England which are not superior to those employed in Russia. 
Whenever Russia is undersold by England, her products will 



ENGLAND AND THE CONTINENT. 34 1 

have to be made by English methods either in England or in 
Russia, and in either case the Russian people will be benefited. 
The only reason England is not injured to-day by competition 
with the countries in Continental Europe is precisely the same 
as that which prevents China from seriously injuring America, 
namely : that while her wage-level is higher, her machinery is so 
much superior to theirs, that it more than makes up the differ- 
ence in the cost of production/ England has less to fear, how- 
ever, from continental competition than we have, because their 
wage-level is nearer to hers than it is to ours, and to the extent 
that American and English machinery is adopted in continental 
countries faster than their wage-level approximates that of Eng- 
land, will their relative competitive power gain upon hers. In 
fact, unless the wage-level in continental countries rises very 
rapidly, it can only be a matter of time when they will occupy 
the same competitive position to England that she now sustains 
to America, in which case she will be compelled either to adopt 
a protective policy or surrender much of her manufacture to con- 
tinental producers. 

It will thus be seen that the seemingly inexplicable phenomena 
over which free-traders and protectionists have vainly contended, 
become perfectly explainable on the principle that international 
competition can only be beneficial when the competitors are ap- 
proximately equal upon the plane of the higher. Therefore a 
protective policy is beneficial to a nation, only as affecting its 
relations with less civilized countries. While America may need 
protection against the machine-made products of all other coun- 
tries, there is no country that can be permanently benefited by 
discriminating against the products of America. So too with 
England ; she may ultimately require a tariff against the machine- 
made products of all other countries but America, and so on. In 
a word, a tariff can only be of any permanent economic advan- 

^ According to Mulhall, 80 % of the productive energy in Great Britain is fur- 
nished by steam, while in continental countries steam only represents an aver- 
age of 36 %. Consequently, the total cost of productive power per thousand 
foot-tons is 17 cents in Great Britain as compared with 27 cents on the con- 
tinent. ' ' This advantage enables us (England) as far as labor is concerned to 
undersell continental countries by 12 j^, although our workmen's wages are 
almost double." — " History of Prices," pp. 54 and 57. 



342 SUPERFICIAL OBJECTIONS. 

tage, to the extent that it protects the opportunity for industrial 
development afforded by a higher wage-level from the uneco- 
nomic influence of a lower wage-level and inferior civilization. 

Section VII. — The Effect of a Tariff upon the Price of 
Home Products. 

There is no objection urged against a tariff policy so much 
emphasized and so frequently repeated as the charge that a tariff 
is necessarily a tax — an oppressive burden upon the consumer. 
The free-trade advocates, especially in this country, deny that it 
is possible to improve the industrial condition of a community 
by any system of tariff legislation. They insist that at best 
it can only enable one class to gain at the expense of another.^ 
Perry regards a protective tariff as an unmitigated curse, and 
says : '' Political economy, denouncing it as the enemy of man- 
kind, hopes soon to throw upon its loathsome carcass the last 
shovelful of cleansing earth." ^ 

It will not, however, be difficult to show that despite the learn- 
ing and dogmatism on its side, this mode of treating the subject 
is exceedingly superficial. The assertion that a tariff is a tax 
bears the stamp of the declaimer rather than the economist ; 
while seeming to say much, it actually says nothing. A tax is 
simply a contribution to the public treasury, and is one of the 
innumerable expenditures that social life makes necessary. The 
payment of' two dollars for a hat or a pair of shoes is just as 
much a burden upon the resources of the citizen as is a tax of 
two dollars for the government. 

Taxes, like all other kinds of expenditures, should be treated as 
an investment, the wisdom or unwisdom of which depends not 
upon its amount, but entirely upon whether it yields more in 
ultimate advantage than it costs in immediate disadvantage. 
This fact can be more easily determined in some cases than in 

^ " We deny that they can gain any thing from us, on account of the law, but 
what we lose ; we deny that the total gains to one part of society by this 
process can ever exceed the total losses of another part — i.e., that the process 
can increase the wealth of the community ; we deny, finally, that our share of 
these hypothetical gains can ever be redistributed to us so as to bring back our 
first loss." — Sumner's " Protection in the United States," pp. ii and 12. 

•2 <■<■ Political Economy," p. 477. 



TAXES ARE INVESTMENTS. 343 

Others. For example, when one buys a steak, by the next meal 
time he can determine whether or not he received an equivalent 
for what he gave ; whether the satisfaction was equal to the cost. 
If he purchases a suit of clothes, however, the result cannot be 
so quickly determined. It will take several months to ascertain 
whether or not an equivalent was given and received. And if he 
invests in a farm or a factory, a still longer time is required to 
decide the wisdom or unwisdom of the purchase. The indirect 
and impersonal nature of governmental expenditures makes a 
still longer time necessary to determine the exact results. 

In order to determine whether or not a tax is a good invest- 
ment, we have to deal with general tendencies or with ultimate 
rather than immediate effects. For instance, if the wisdom of 
the expenditure involved in maintaining an army, navy, police 
force, were determined by the immediate effects at any given 
time, it would be regarded as waste. Nevertheless the ex- 
penditure necessary to enforce law and order is regarded as 
a good investment even by free-traders. It procures as good 
economic results as the expenditure for food, clothes, or shelter, 
since it is essential to their enjoyment. 

The same is true of education, but the effects here are still 
further removed from direct observation, and consequently 
must be judged on a still broader general basis. There are in 
some countries, and indeed in some parts of this country, those 
who regard a tax for the public schools as an oppressive burden, 
an unjust exaction. But upon a broader view of the subject it 
appears that their general social safety, freedom, and well-being 
largely depend upon the intelligence of the great mass of the 
community in which they live, and this to a great extent depends 
upon opportunities for popular education. Experience has con- 
clusively shown expenditure in public schools to be a good invest- 
ment ; it comes back in better citizens and a higher civilization, 
which in turn supplies all the influences and conditions that make 
cheaper wealth and larger freedom possible. 

In the same way must we estimate the wisdom or unwisdom of 
a protective tariff. In considering the effect of a tariff policy 
upon the price of home products, we must not consider alone the 
direct and immediate effect upon prices, but also the indirect and 
ultimate effect. It has already been pointed out that the test of 



344 TARIFFS AND PROFITS, 

cheapness is the ratio in which labor will exchange for wealth, 
things being cheap or dear according as a large or small quantity 
can be obtained for a day's labor. If home products can be 
undersold by foreign, solely because labor is cheaper abroad than 
here, the only result would be a readjustment of prices on the 
lower wage-level, with no advantage to anybody. Let us assume 
that a 20 per cent, tariff is necessary to prevent the home products 
from being thus undersold, that 20 per cent, would not in any 
sense be a tax upon the American consumer, because if that tariff 
were not applied, the wage-level would be coramensurately low- 
ered and a day's labor would purchase no more wealth than 
before. To say that under such conditions the home producer 
is enabled to add as profit on his whole product an amount equal 
to the tariff upon the foreign product, is to exhibit a striking 
unacquaintance with economic phenomena.^ All that a tariff 
can do in such instances is to prevent a readjustment of prices 
on a lower wage-level. Prices however, would be governed by 
cost of production, according to the law before stated, just as if 
there were no tariff. The competition between home producers, 
together with the effort of the consumers to purchase at the 
minimum, will force prices down to the cost of producing the 
most expensive portion of the necessary supply. All who can 
produce at less than that, will obtain the difference as profit. 
Unless the cost of producing that dearest portion can be lessened 
by some other means than by lowering wages, it is utterly impos- 
sible to make any improvement by reducing price. 

This much however, only applies to the direct and immediate 
effect, and is usually the only aspect which the advocate of 
laissez /aire stops to consider. The permanent economic influ- 
ence of a protective tariff upon the price of home products, 
however, is the indirect and ultimate effect rather than the im- 
mediate and direct. In preventing the products of dear labor 
from being undersold by those of cheap labor, the tariff protects 
the home market for the home producer. The economic effect 
of this, as already shown, is to promote the growth of manufac- 
turing industries, and to concentrate population, which in turn 
creates a social environment that develops new tastes and habits, 
and these elevate the standard of living among the masses, and 
^ Cf. President Cleveland's message December 6, 1887. 



THE PRICE OF COTTON CLOTH. 345 

consequently enlarge the demand for an increasing quantity and 
variety of products. 

The necessary tendency of this is to develop a higher grade 
of social character and general intelligence, more inventive genius 
and improved methods of production, by which the cost and 
therefore the price of commodities is ultimately lowered without 
reducing wages. From the foregoing it will be seen that a tariff 
or any thing else which prevents a readjustment of prices on a 
lower wage-level affords protection to the opportunity for devel- 
oping better productive possibilities through the use of labor- 
saving and wealth-cheapening methods. The effect of a tariff 
upon the price of home products, therefore, when applied accord- 
ing to the principles here laid down, is, first, to prevent a wasteful 
readjustment of economic relations on a lower wage-plane ; 
second, to protect opportunities for increasing productive pos- 
sibilities and thereby make a readjustment of economic relations 
on a higher wage-plane necessary. 

If space permitted it could easily be shown that, despite the 
frequent unseemly higgling and hauling to help local producers 
by absurd tariff schedules, this has been the general effect of the 
protective policy of this country. Take, for example, the cotton 
industry, to which reference has already been made. For reasons 
not necessary to explain here, the factory system had its rise in 
England, and by the close of the first quarter of the present cen- 
tury the use of steam-driven machinery, especially in the manu- 
facture of cotton cloth, had become well established. At that 
time the cotton industry in this country was in its infancy, being 
mostly carried on in small factories run by water-power. The 
difference in the development of this industry in the two countries 
is clearly shown by the number of factories, amount of capital, 
etc., which, in 1830, was as follows: 

Number of establishments .... 

Capital invested per establishment . 
Number of spindles per establishment 
Number of looms per establishment 
Number of operatives per establishment . 
Weekly wages ^ ..... . 

Price per yard ...... 

^ These figures represent for England (1833) the average Aveekly wages of 
67,819 cotton operatives. And for America they represent the average wages 
of 31,471 cotton operatives in New England (1830). 



i^ngland. 


America. 


1,151 


801 


$147,680 


$50,702 


8,108 


1,55b 


87 


41 


205 


77 


$2.51 


I3.46 


I5i 


17 



34^ PROTECTION GAVE OPPORTUNITY. 

It will be seen from the above that the English manufacturer 
had a double advantage over the American. In addition to 
having nearly half a century's start in the development of factory 
methods, by which he had acquired a much greater concentration 
of capital and more efficient use of machinery, he had an advan- 
tage of nearly 40 per cent, in the cost of his labor. No argument 
is necessary to show that under such conditions it was impossible" •! 
to prevent our cotton cloth from being undersold by the English 
without reducing American wages fully one third. Nor would 
this reduction in wages have been limited to the factory opera- 
tives ; for even if the American manufacturer had imported 
English machinery free of duty, the higher wages of the brick- 
layers, masons, carpenters, painters, etc., would have made his 
building and general plant cost more than the English. It would 
have been necessary, therefore, to have reduced wages in all these 
industries to practically the same level as those in England, in 
order to be able to compete with the English manufacturer in our 
home market. To obviate this difficulty and make it possible for 
the American manufacturer to produce for the American market, 
a tariff was levied upon English cotton cloth. This, however, did 
not increase the price of the American product, as is commonly 
assumed, but it increased the price of the English product, there- 
by preventing the price of American cloth from falling to the 
English level, and making it unnecessary to reduce wages here in 
the cotton and several other industries. By thus putting the 
American producer on an approximate competitive equality with 
the English in the American market, an economic basis was 
furnished for the development of cotton manufacture in this 
country. 

Nor did this tariff create a monopoly, by which the price of 
cotton cloth could be abnormally increased and fabulous profits 
obtained by the American producer. On the contrary, it pre- 
vented the English producer from monopolizing the American 
market through the use of cheaper labor. So long as the English 
producer, by paying lower wages, could undersell the American, 
there was no inducement for the American to take the risk of 
investing capital in improved machinery. But when this uneco- 
nomic advantage was removed and the competitors in the Ameri- 
can market were put upon substantially the same wage-level, a 



IMPROVED METHODS. 34/ 

strong incentive for developing superior methods was created, 
since their use became the only means of success. 

With the rapid increase of population which our high wage-level 
stimulated the home market steadily increased, making a larger 
production necessary. This naturally led to a greater concentra- 
tion of capital, the use of larger factories and better machinery, 
and the result is that cotton cloth, which could not be produced 
for less than seventeen cents a yard in 1830, can now be furnished 
at a profit for five cents a yard, while the laborer receives double 
the wages he did then.^ The development of wealth-cheapening 
methods in the cotton industry, which the protection of the home 
market has made possible, will be seen by the following facts for 
England and America in 1830 and 1880 : 

England. America. 





1830. 


1880. 


1830. 


1880. 


No. of establishinents 


1,151 


2,671 


801 


726 


Capital per estab. 


$147,680 


$140,292 


$50,702 


$275,503 


Spindles per estab. 


8,108 


14,798 


1,556 


14,089 


Looms per estab. 


87 


192 


41 


298 


Laborers per estab. . 


205 


180 


77 


228 


Wages 


$2.51 


$4.66 


$3.46 


$6.45 ' 


Price of cloth per yard, 


i5i 


6f 


17 


.07 



It will be observed from the above that in 1830 the concentra- 
tion of capital in the cotton industry was very much greater in 
England than in America, the ratio of capital to establishments 
being nearly three times as large, that of spindles more than five 
times, that of looms twice as great, and that of operatives nearly 
three times as great as in this country, while wages were 2>^ per 
cent, lower. But in 1880 their relative position is reversed. 
While in England the total capital invested had a little more than 
doubled, in America it had increased more than 400 per cent. In 
England, with the increased capital, the number of establishments 
had been commensurately increased, while in America the number 

^ See Part III., chap, iv., sec. v. 

2 The wages in this table represent Massachusetts and England for 1883. 
The average weekly wages for the whole period from 1872 to 1883 inclusive, in 
the cotton industry, were : in England, $4.60 ; in Massachusetts, $7.68 — being 
66.96. per cent, higher in Massachusetts than England. See " Massachusetts 
Labor Bureau Report for 1884," p. 419. 



348 EFFECT UPON OTHER INDUSTRIES. 

of establishments was actually reduced. Hence, in 1880 the 
amount of capital per establishment in England was $7,000 less 
than in 1830, while in America it was five times as large. The 
ratio of spindles to establishments only increased in England 
about 82 per cent., while in America they increased 800 per cent. 
The number of looms per establishment in 1880 had a little more 
than doubled in England, while in America they increased six- 
fold. During this period the number of operatives per establish- 
ment in England diminished from 205 to 180, while in America 
they increased from 77 to 228 ; and while wages in England rose 
$2.15 a week, in America they rose $2.99 a week. All this clearly 
demonstrates that the concentration of capital and the use of 
labor-saving appliances in this industry made greater progress in 
America than in England after the home market regime was in- 
augurated. This is further shown by the fact that the price of 
the product has been reduced more here, even with a greater rise 
in the wages, than in England. Consequently, so far as the 
manufacturing process is concerned, cotton cloth can be made 
cheaper in America to-day than in England, notwithstanding 
that wages in the same industry are 38 per cent, higher here than 
there. 

Nor was the beneficial effect of protecting the home market 
in this instance limited to the cotton industry. The concentration 
of capital and development of large factories in the cotton industry 
naturally created a demand for machinery, which gave rise to 
various branches of home manufacture in the iron industry and 
the numerous industries involved in the building trades. With 
this growth of manufacture and diversification of employment, 
industrial centres became large cities, which furnished a steadily 
increasing market for the products of our food and raw material, 
producing population. This in turn necessitated railroads, which 
still further lessened the cost of production, diversified industry, 
cheapened travel, and thereby enabled the daily paper to penetrate 
the rural districts, and the country population to come into more 
frequent contact with city life ; and in other manifold ways de- 
veloped the socializing influences of the nation, thus reacting upon 
the social life, standard of living, and wages of the laboring class. 

Without attempting to follow the various phases of industrial 
development directly or indirectly resulting from the protection 



WAGES IN NON-PROTECTED INDUSTRIES. 349 

of the home market, it is perfectly safe to say that, with the ad- 
vantage that England had in factory development, it would have 
been impossible to develop cotton and many other kindred 
manufacturing industries without the imposition of a tariff, or 
some other restrictive policy, unless we had lowered our wages 
to the English level. To have done that would have destroyed 
the incentive for emigration and thereby arrested the rapid in- 
crease of our population, which in turn would have commensu- 
rately checked the growth of our home markets, and thus 
necessarily have greatly hindered the development of many 
manufacturing industries. And if, without a tariff we had main- 
tained our higher wage-level, not only our cotton cloth, but 
nearly all our manufactured products, would have been made in 
England, and we should have remained practically an agricultural 
people, and hence, in all probability, would now be a third- or 
fourth-rate nation, with a scattered population of perhaps from 
twenty to thirty millions, having smaller wages, less general in- 
telligence, and therefore a lower civilization than England. 

Section VIII. — The Relation of Protection to Wages in Non- 
Protected Industries. 

One of the most plausible objections urged against tariff legis- 
lation is that it affords no benefit to those engaged in non-pro- 
tected industries. It is insisted that in order to justify a tariff 
policy, its advocates are bound to show that it is as advantageous 
to those engaged in non-protected as in protected industries. 
Nor is this an unreasonable demand ; there can surely be no 
justification for any public policy which benefits one portion of 
the community only at the expense of another. That the theory 
of protection as hitherto presented has failed to fulfil this require- 
ment can hardly be questioned by its most enthusiastic disciples. 
The protectionists unquestionably believe that the whole com- 
munity is benefited by a tariff policy, but they have hitherto failed 
to explain how a tariff on the various articles of food, clothing, 
furniture, and the like, benefits the carpenter, painter, plumber, 
bricklayer, mason, engineer, compositor, and other domestic 
artisans. This is chiefly due to the fact that they have accepted 
the economic postulates of the laissez-faire economists, especially 



350 GLADSTONE AND BLAINE: 

regarding wages, prices, and profits, thus rendering a philosophic 
conception of the protective principle logically impossible. We 
have a striking illustration of this in Mr. Blaine's argument upon 
that point in his recent controversy with Mr. Gladstone. He 
said : 

" He [Mr. Gladstone] sees that the laborers in what he calls 
the ' protected industries ' secure high pay, especially as com- 
pared with the European school of wages. He perhaps does not 
see that the effect is to raise the wages of all persons in the United 
States engaged in what Mr. Gladstone calls the ' unprotected in- 
dustries.' Printers, bricklayers, carpenters, and all others of that 
class are paid as high wages as those of any other trade or call- 
ing, but if the wages of all those in the protected classes were 
suddenly struck down to the English standard, the others must 
follow. A million men cannot be kept at work for half the pay 
that another million men are receiving in the same country. 
Both classes must go up or must go down together." ^ 

This statement, which represents the gist of the modern pro- 
tectionist position regarding the economic relation of protection 
to wages, implies two assumptions, neither of which is correct : 
(i) that wages are directly increased by the tariff in protected 
industries ; (2) that through competition the rise of wages in 
protected industries brings the wages in non-protected industries 
up to the same level. 

I. The idea that wages are high in protected industries be- 
cause the tariff enables the manufacturer to obtain large profits, 
and hence to pay higher wages, is one of the most popular falla- 
cies connected with the whole tariff discussion. Even if tariffs 
increased profits, that would not necessarily increase wages. 
Employers do not raise wages merely because profits are large. 
The increase of wages, except in rare cases, does not come 
through the generosity of the employer, but through the pressing 
demands of the laborer. Every laborer knows and every states- 
man ought to know that protected employers are as ready to 
reduce wages, as reluctant to increase them, and have as many 
strikes, as do unprotected employers. But the assumption that 
profits are larger in protected than in unprotected industries has 
no foundation in fact. Even if a tariff did at first produce this 

^ North Aniericaiz Revieiv, January, i8go, pp. 47, 48. 



BLAINE'S MISTAKE. 35 I 

effect, it would soon be destroyed by competition, as capital would 
leave unprotected to engage in protected industries, where larger 
profits would be obtained. 

Had the economic law of profits been understood, no such 
assumption would have been made. It would then have been 
seen that if there is any competition between producers in the 
same market, the price of the commodity would tend to equal 
the cost of p7'odiici?ig the most expe7isive portion of the general supply. 
If the cost of producing the dearest portion is lessened by free 
trade, the price will fall ; if it is increased by protection, the price 
will rise. But this change will affect the consumer's price, not 
the employer's profit. The profit in either case will represent 
the difference in the cost of production, increasing as the cost 
diminishes below that of the dearest competitor, a difference 
which neither free trade nor protection can affect. 

2. Mr. Blaine's statement, that " a million men cannot be kept 
at work for half the pay that another million men are receiving 
in the same country," is also very unfortunate, as that is just what 
is actually taking place all the time. Coal miners, agricultural 
laborers, and many others are working every day in this country, 
in many instances for less than half the pay that many classes of 
workmen in the cities are receiving. And what makes this posi- 
tion still more unfortunate is the fact that the printers, engineers, 
bricklayers, carpenters, and others, whose wages are the highest, 
are employed in non-protected industries ; hence this cannot be 
the result of competition with the lower wages in protected in^ 
dustries. " Neither is this difference in wages in the same country 
peculiar to nationality or to political institutions ; it is as great 
in America with protection and democracy as in England with 
free trade and monarchy, or as in Germany with protection and 
despotism. Instead of wages tending to uniformity in all indus- 
tries in the same country, they tend to a greater diversity as 
industrial differentiation advances. The only sense in which 
wages tend to uniformity is in the same industry contributing to 
the same market.^ 

Nor is Mr. Blaine's statement, that " both classes must go up 
or must go down together," any nearer correct. Experience 
shows that they do not necessarily do any thing of the kind. For 
^ See chapter on Wages. 



352 CAUSE OF BLAINE'S ERROR. 

instance, in 1725 the wages of agricultural laborers in England 
were 5^. 4^. (f 1.28) per week ; those of carpenters, masons, brick- 
layers, and other domestic artificers were 6j. ($1.44) a week. In 
1800 the wages of agricultural laborers were ws. $d. ($2.74); 
those of domestic artificers 18^. ($4.38). In 1840 wages of agri- 
cultural laborers v/ere us. ($2.64) ; of artificers ^^s.^ ($7.92). 
In 1877 wages in the London building trades were 42s. gd.^ 
($10.26) a week, while in agriculture wages were about 135-. 
(J3.12) a week, being only i4J-. ($3.36) in 1884.^ In a word, 
during the present century the wages of mechanics and artisans 
have increased more than twice as much as those of agricultural 
and other rural laborers. The truth is, a protective tariff does 
not affect wages in any such manner as indicated by Mr. Blaine.* 
The laborer knows from experience that an increase in the 
tariffs on the particular commodity he produces does not 
yield any commensurate increase in his wages. And to persist 
in telling him that it does, can only result in destroying his 
confidence in the economic advantage of a protective policy. 
If working men are expected to take an intelligent interest in 
protection, a more rational explanation of its advantages must 
be presented. 

^ Wade's " History of the Working Classes," p. 166. 

^ Rogers' " Six Centuries of Work and Wages," p. 539. 

^ Mulhall's " History of Prices," p. 125. 

"* This argument clearly shows that the American protectionist has not yet 
outgrown the English demand-and-supply (wage-fund) fallacy, which is further 
shown by the fact that Mr. Blaine actually ascribes the rise of wages in England 
to the increased demand for labor here. — North American Review, January, 
1890, p. 48. If this were true why did not wages rise still more in Ireland, 
Germany, Italy, Bohemia, etc., from which countries the emigration has been 
much greater than from England, and why have wages risen as much in France, 
with almost no emigration, as in continental countries, where emigration has 
been the greatest ? The truth is that voluntary emigration tends to check rather 
than promote the rise of wages, because it draws off the best laborers upon whom 
a rise in the wage-level depends. It is only when the lowest laborers are ex- 
ported that home wages are improved by the change. That is why the condition 
of the laborers in any country can best be improved at home. Hence the true 
economic policy is to develop the home market and diversify domestic industry 
instead of relying upon emigration as the means of relieving industrial distress. 
The true way to help the people of Russia, India, and China is to take our 
civilization to them and not to bring them to our civilization, and this can best 
be done by developing our own possibilities. — See section ix., p. 98. 



HOW TARIFFS AFFECT WAGES. 353 

Considered from the point of view here taken, however, these 
seemingly conflicting facts are easily explained. When we under- 
stand that the price of labor, like that of commodities, is governed 
by the cost of furnishing the dearest portion of the necessary 
supply, and that this cost is determined by the laborer's standard 
of living, which in turn depends upon his character and social 
environment, the whole subject assumes a new aspect. It then 
becomes apparent that no influences can permanently affect 
wages which do not operate upon the laborer's social life and 
standard of living. The only way a tariff can do that is by 
promoting the concentration and diversification of industry, 
thereby creating more complex social relations that, stimulate 
the growth of new desires and habits and a higher plane of 
living. Manifestly these influences operate just as much upon 
the laborers in non-protected as in protected industries. The 
non-protected printer, carpenter, and painter obtain just as much 
advantage from the social influences of a manufacturing city as 
do their protected neighbors, the hatter and cigar-maker. The 
wages of city mechanics are higher than those of rural laborers 
because their standard of living is higher, which is owing to the 
more complex social conditions under which they live. It is 
only to the extent that a tariff promotes the development of these 
social conditions by protecting the home market that it in- 
fluences wages in any industry. Upon the principle therefore 
that protection is economically beneficial only as it tends to 
develop the socializing influences of the nation, it is clear that its 
effect upon wages is not limited to protected industries, but that 
it effects equally the wages of all laborers to the extent that it 
directly or indirectly affects their social environment. 

If it were true, as is usually assumed, that a tariff benefits the 
laborer through increasing the employer's profits and thus en- 
abling him to pay higher wages, it wonld be true as is often urged 
that the non-protected mechanic has no interest in a protective 
policy. And so long as that view is taught by leading protec- 
tionists, we may expect to see the intelligent laborers in domestic 
industries, especially in our large cities, become free-traders. 
But from the point of view here presented their interest in a 
protective policy is quite as great and often greater than that 
of those employed in the most highly protected industries. With- 
23 



354 SOCIAL FORCES ONLY RAISE WAGES. 

out the development of cities and manufacturing centres, as 
already shown, railroads, telegraphs and other industries, to say 
the least, would have been in a much less advanced state/ . In 
which case the industrial and social environment of the great mass 
of mechanics would have been more homogeneous, hence a more 
simple social life and lower wages would have been inevitable, as 
is the case in small towns, rural districts, and non-manufacturing 
communities throughout the world. To the extent that a tariff 
policy has developed manufacture and the growth of cities, it has 
improved the social life and wages of laborers in ^//industries 
in those industrial centres, protected and non-protected. . And 
to the extent that it has developed railroads and telegraphs, it 
has shortened the distance between farm and factory, and thereby 
increased the opportunities that force rural laborers into more 
frequent contact with the social influences of city life, — thus in 
its reflex action elevating the social life and wages of rural 
laborers. This explains why the wages even of agricultural and 
other laborers in isolating occupations are always higher in the 
immediate vicinity of cities and manufacturing towns. ^ 

This view of the subject also enables us to understand why a 
tariff will not produce the same effect in a small community like 
an Australian colony, that it will in a large country like the 
United States, even though the wage-level is as high there as it is 
here. It is because the population there is too small to furnish a 
sufficiently large market to sustain the use of the most highly de- 
veloped factory methods, without which the socializing environ- 
ment necessary to raise the standard of living and the rate of 
wages cannot be developed. 

There is one other fact that should be noticed before leaving 
this point. We are told that despite the improvements in ma- 
chinery and the general advancement, the condition of the factory 

^ Witness India, Russia, and Turkey as compared with this country in these 
respects. There are six times as many miles of railroad in New York State as 
in all Turkey, and more miles of railroads in the United States than in all the 
rest of the world. 

^ This fact has been universally observed though very little understood. See 
"Wealth and Progress," pp. 160-163 ; Rogers' "Six Centuries of Work and 
Wages," pp. 171, 172, 180, 327, 535, 536. Also " Wealth of Nations," Book 
I., ch. viii. For similar facts in India see Buchanaii's " Journey through the 
Countries of Mysore, Canara, and Malabar," vol. i., pp. 124, 125. 



MINERS AND FACTORY OPERATIVES. 355 

operatives of New England and the miners of Pennsylvania is no 
better, but in many cases is worse, than it was forty years ago, 
although the products of these industries are highly protected. 
There is some truth in this statement, and a great deal of error. 
In the first place, it is not correct in any general sense to say that 
the condition of the miners and factory operatives has not im- 
proved. It is true, however, that the condition of the laborers 
employed in those industries to-day, as compared with those 
of forty years ago, has not improved commensurately with the 
progress of the community. This fact is usually taken as con- 
clusive evidence that, through some unjust manipulation of in- 
dustrial forces, the laborers in these industries have been excluded 
from the beneficial effects of the increasing wealth and social 
advancement. 

A little closer examination of the facts, however, will show 
that this conclusion "is erroneous. Suppose, for example, that in 
a given business the laborers were intelligent Americans in 1850, 
but for some reason they all left it and their places were filled by 
Italians or Chinamen, would it be any test of the industrial and 
social progress of the laborers in the community to compare the 
wages, character, and intelligence of these Chinamen and Italians 
in 1890 with those of the Americans who were employed in that 
industry in 1850 ? Such a comparison would be rejected by any 
fair-minded investigator as unworthy of a moment's consideration. 
He would very properly insist that, in order to ascertain the 
improvement in the laborer's condition from 1850 to 1880, we 
must compare the condition of the same laborers. The wages 
and social condition of the Chinamen and Italians might have 
improved a hundred per cent., and still be no better in 1890 than 
were those of the American laborers in 1850. The only way to 
ascertain whether or not, or to what extent, the laborer's con- 
dition has improved, is to compare the condition of the American 
laborers in 1890 with their condition in 1850, and also the con- 
dition of the Chinese and Italian laborers in 1890, not with that of 
the Americans, but with their own condition in 1850. 

Now this is precisely what has taken place in New England 
factory life. The operatives of forty years ago were mainly 
composed of native Americans, mostly children of the New 
England farmers. During this period the industrial history of 



356 EVOLUTION OF INDUSTRIES. 

America has been unlike that of any other country in the world. 
Owing to our higher wage-level and the protection of our home 
market, manufacture and a variety of occupations increased much 
faster than did our native population. The consequence was a 
continuous stream of emigration to this country. The introduc- 
tion of every new industry of a higher order naturally drew to it 
the more intelligent and characterful portion of the laborers from 
the grade below, their places being filled by the less competent. 
By this means there was an almost constant movement of laborers 
from the more simple to the more complex and artistic industries, 
and the less advanced laborers from other countries taking the 
simpler occupations. In the cotton industry, for example, as 
Americans moved up into the position of overseers, managers, or 
merchants, their places were taken first by English, next by Irish, 
and last by French Canadian operatives, so that to-day an Ameri- 
can is scarcely to be found in the cotton factories of New England, 
except in the superior positions, many of the various grades 
of overseers, machinists, etc., being English or English-Irish. 
Therefore, if we compare the wages and social conditions of the 
spinner and weaver in New England cotton factories to-day with 
those of 1840, we are not dealing with the same class of people 
at all, nor even with the effects of the same civilization. The 
French or Irish operative may not be very much better off to-day 
than was the American who occupied the same position forty years 
ago, and yet his condition may have been improved several hun- 
dred per cent. The same is true of the miners of Pennsylvania, 
who to-day are largely composed of the poorest laborers from 
Continental Europe. 

In order, therefore, to ascertain the progress that has taken 
place in the industrial and social condition of these classes of 
operatives, we must not compare their present condition with that 
of the American forty years ago, but with their own condition at 
that time. If we compare the condition of small merchants in 
New England to-day with that of factory operatives of 1850, or 
compare the condition of the English, Irish, and French Cana- 
dian operatives in New England and the miners of Pennsylvania 
to-day with what it was in England, Ireland, Canada, Scandi- 
navia, Bohemia, or Russia thirty or forty years ago, the improve- 
ment will appear as marked as in that of any other class in the 



EFFECT UPON OTHER COUNTRIES. 357 

community. To overlook this is entirely to misapprehend the 
phenomena under consideration. These facts are not referred 
to here to give a rose-colored tint to the condition of these 
laborers ; on the contrary, I regard their condition, in many 
instances, as not only a disgrace but as a serious danger to our 
civilization.' They are referred to, only to emphasize the mistake 
of ignoring them in considering the effect of modern industrial 
influences upon the social condition of the laborers ; because it is 
only by recognizing all the facts in the case, that we can form any 
true estimate of the beneficial or other effects of any industrial 
policy. Hence it may properly be said that to the extent that 
protection has promoted the growth of manufacturing industries 
it has directly and indirectly improved the social condition and 
raised the wages of all classes of laborers in this country com- 
mensurately with the advance of the community. 

Section IX. — The Influence of Protection in the Most Ad- 
vanced Countries upon the Progress of the Less Advanced. 

Perhaps the most specious argument employed in favor of a 
free-trade policy is that it is cosmopolitan in its character, that 
it rises above local, sectional, or even national considerations, 
treating all mankind as brethren, while protection is pre-emi- 
nently a local policy that endeavors to discriminate against the 
people of all other countries in favor of its own. It may be ad- 
mitted that any policy which promotes the welfare of one country 
at the expense of another is essentially unphilosophic, and that 
the best policy for any country is the one whose beneficial effects 
are most universal. The economic character of a public policy, 
however, should never be judged by its immediate or temporary 
effect, but always by its permanent and ultimate influences. 
Measured by this standard, it is not difficult to show that the 
protective principle as here laid down is pre-eminently cos- 
mopolitan in its character. 

It may be regarded as a self-evident proposition that he who 
would help others must first develop the best in himself, since not 
to develop his own capacities is to limit his usefulness. The most 
altruistic effects are usually produced by efforts to broaden and 

^ See '-' Wealth and Progress," pp. 365-373. 



358 SELF-IMPROVEMENT THE FIRST STEP. 

elevate our own social life, because every addition to our own 
life embraces more of the efforts, interests, and well-being of 
others. In proportion as the interests of others becomes iden- 
tified with our own, will our efforts be directed to promoting 
their welfare as much as our own. In other words, in proportion 
as we become socially interdependent do our efforts become 
altruistic and cosmopolitan. Indeed, it is only by increasing 
man's interdependence upon his fellow-man that the solidarity 
of the human race will ever be realized, and the altruism which 
shall make every man's happiness include that of all mankind 
become an established fact. 

This is as true of nations as of individuals. The nation which 
would contribute most to the advancement of human progress 
must develop its own civilization. AVe might as well expect the 
weak to carry the strong, as barbarism to aid civilization. That 
nation which most completely develops its own industrial and 
social possibilities, creates the most improved methods of pro- 
duction. In this way it is not only able to obtain its own 
wealth cheap, but ultimately to produce many commodities at less 
cost than can be produced by the cheap labor of less civilized 
countries. Upon the principle that whatever undersells succeeds, 
the less civilized countries are compelled to adopt the superior 
methods. Thus the benefits of inventions which result from the 
development of a higher civilization are automatically transferred 
to the lower, and the socializing influences of improved methods 
of production become cosmopolitan. 

This is clearly demonstrated by the adoption of various. kinds 
of American machinery abroad, without the use of which many 
European products would have been undersold by ours. Nor are 
the benefits which more highly civilized countries confer upon 
the lower, limited to what is forced upon them by competition in 
commodities which they both produce. A still greater benefit 
arises from the introduction of new commodities, which more 
diversified tastes and more complex social life of the more 
highly civilized country bring into existence. As a demand for 
new commodities increases, labor-saving appliances are invented 
to reduce the cost of their production, until they can be sold in 
foreign countries at merely a nominal price. In this case the 
products of a higher civilization are not competing with those 



ECONOMIC SELECTION OF INDUSTRIES. 359 

of a lower, but new products are being introduced into less 
civilized countries ; this stimulates a taste for articles they have 
not hitherto used, thereby introducing new elements into their 
social life. Just as fast as a demand for such new commodities 
is created, the social life is diversified, the standard of living 
is raised, wages are increased, and a market basis for new 
industries is established. This is what the diversified tastes 
and inventive genius of America have been doing in Europe 
and South America to an increasing extent during the last 
twenty years. 

Another advantage of a protective policy is that it tends to 
make the economic selection of industries possible, thereby 
promoting the only conditions upon which free trade between 
nations can ever take place without injury to the higher- wage 
country. 

The postulate, so frequently emphasized by the advocates of 
laissez faire, that nations, like individuals, should be enabled to 
adopt those industries for which they are best fitted, is unexcep- 
tionable. But in order to obtain this result, it is necessary to 
secure opportunities for developing the economic possibilities 
of the people. It should ever be remembered that the most effec- 
tive economic force in society is human invention and not 
natural resources, as is commonly assumed. For reasons already 
explained, labor-saving inventions can be developed only under 
the influence of socializing and diversified industries. These 
conditions, without which a truly economic selection of industries 
is impossible, are what protection furnishes. 

Although it may be possible for these conditions to exist with- 
out protection, history does not furnish an instance where such a 
thing has occurred. The way in which protection promotes 
this is easy to understand. In the first place, by raising the 
basis of international competition to the plane of the higher wage- 
level, it pre^^nts the lower-paid labor of one country from being 
made the means of checking the growth of manufacturing in- 
dustries in another. This secures a home market for domestic 
products and furnishes an economic basis for a diversification 
of socializing industries in the higher wage-country. The greatest 
incentive is thus furnished for developing the most economic 
methods of production. With concentrated capital, the use of 



360 PROTECTION- PROMOTES FREE TRADE, 

highly perfected machinery, and the development of specialized 
industries, a truly economic selection of industries becomes pos- 
sible. The conditions will then exist for determining what things 
a nation can most economically produce, by reason of its pe- 
culiar character, natural resources, and civilization. 

When this point is reached, protection will be economically 
necessary only to the extent of preventing the substitution of 
simple for complex industries. It will then be to the advantage 
not only of that nation, but of the world, that it should devote 
its productive energies to those industries for which it has devel- 
oped the best capacity, and to relinquish all others to countries 
for which they are better adapted. Just in proportion as this 
takes place, protection becomes unnecessary — -provided^ however^ 
that this cha7ige does not involve the substitution of simple for com- 
plex industjHes. For example, if America becomes highly profi- 
cient in the manufacture of jewelry and relatively deficient in 
the manufacture of silk, capital will naturally go to the former 
and away from the latter industry. Foreign silk might then be 
admitted free of duty without injury to the American laborer. 
It will thus be seen that protection (as here considered) not only 
prevents a less civilized country from checking the progress of a 
higher, but by promoting the substitution of economic for natural 
(blind) selection of industries, it tends ultimately to make a mu- 
tually advantageous free trade possible. 

Thus a protective policy is not necessarily narrow and ex- 
clusive, but, when philosophically applied, is a most truly 
cosmopolitan doctrine of industrial relations, because it tends 
first, to develop home industry and civilization without injuring 
others, and second, to automatically extend these beneficial 
results to all mankind. 

Here, then, we have a truly philosophic and strictly economic 
basis for applying the protective principle both to foreign and 
domestic industrial relations. It consists in securing the present 
and promoting the future opportunities (incentive-creating con- 
ditions) for developing the highest industrial and social possibili- 
ties of a people, and may be briefly summarized thus : 
Foreign — Applied to the industrial intercourse of nations, a 
true protective policy is to prevent the products of the more 
advanced countries from being undersold by the products 



PROTECTIVE PRINCIPLE APPLIED. 36 1 

of less civilized countries, through the use of lower paid 
labor ; thereby securing opportunities for developing the 
best methods of production afforded by the larger consump- 
tion and higher social life of the more advanced country. 

Domestic — Applied to the relations of individuals and classes 
within the nation, this policy is one to guarantee the safety 
of persons and property with the maximum amount of indi- 
vidual freedom, and to secure the education, leisure, and 
other like conditions, v/hich tend to develop the best physical, 
intellectual, and moral qualities of the individual citizen. 
The scientific application of this principle to the various phases 

of industrial, social, and political life is the true function of 

statesmanship. 



CHAPTER IV. 
THE PRINCIPLES OF ECONOMIC TAXATION. 

Section I. — The Economic Basis of Equitable Taxation. 

In the preceding chapter, taxation was discussed solely as an 
instrument of industrial protection and national development. 
It is now proposed to consider taxation as a means of obtaining 
public revenue. In order to determine how to obtain the neces- 
sary revenue with the least expense and the greatest equity to all 
classes, it is necessary briefly to consider : (i) the principle which 
should determine the individual's contribution to the state ; (2) 
the source from which the contribution should be drawn. 

(i) The principle which should govern individual service to 
the state is a much debated one. It has been contended by 
some that a tax should be proportionate to the degree of pro- 
tection furnished by the state. According to this view, if one 
class of property is exposed to more danger than another, its 
owners should pay a proportionately higher tax. The objection 
to this is that it would place the greatest burden upon those least 
able to bear it. Assuming taxes to stay where they are put, 
under this system the owners of coal mines, stone quarries, 
and land would be almost exempt from taxation, while those 
engaged in manufacture and commerce would have to pay very 
high taxes. Moreover, the very poor and helpless, who most 
frequently need the aid of the state in many forms and are least 
able to contribute, would be the most heavily taxed. Since the 
function of government is to protect and promote opportunities 
for increasing the well-being of the individual, the most equitable 
basis on which the individual can be called upon to serve the 
state, is evidently his ability to contribute v/ithout injury to him- 

362 



PROPERTY TAX. 363 

self. This idea is more or less generally recognized, as is shown 
in the frequent demand to have a heavier tax imposed upon com- 
modities consumed by the rich than upon those consumed by the 
poor. And the frequent demand for taxing incomes above a 
certain amount, the exemption of wages and small homesteads, — 
all of which are efforts to make the rich contribute more to the 
public revenue than the poor, upon the principle that they are 
more able to contribute. 

(2) From what source should this tribute to the state be drawn, 
or what is the best measure of an individual's capacity to pay 
without injury to his own well-being ? It is commonly assumed 
that the ability of a citizen to pay a tax is proportionate to the 
property he owns ; this, however, is far from being correct. For 
instance, one may legally own a large amount of property which 
is so highly mortgaged as to make his ownership merely nominal. 
To tax such a man in proportion to his property would impover- 
ish him, while the effect of a similar tax upon his neighbor whose 
property is free from mortgage would be relatively slight. One 
manufacturer with a large plant may, through a mere change of 
fashion or other social cause, be working at a loss, while another, 
with a similar plant, but who is unaffected by the fashion, may be 
making large profits. 

Clearly, to tax the property of these two at the same rate would 
be to deprive the former of his means of getting a living, while 
from the latter it would take but a fraction of his surplus, and hence 
would in no way impair his present industrial or social status. 
Manifestly then a uniform tax upon product or property would 
not fall with equal weight upon all. In other words, the owner- 
ship of property does not constitute a correct measure of the in- 
dividual's ability to contribute to the public revenue. There is 
but one source from which wealth can be taken with the certainty 
that it will not inflict a burden, and that is, surplus income, which 
embraces all the forms of rent, interest, and profit. 

The reason this form of income can be taxed with the least 
burden to its owner is that it does not enter into the necessary 
cost of his living. The cost of the social well-being of all who 
participate in production being a part of the necessary cost of 
production is represented by wages and salaries, the surplus is 
what remains after these costs are defrayed. Consequently, al- 



364 MOBILITY OF TAXES. 

though to pay a tax from one's surplus is to lessen one's wealth, 
it does not intrench upon the normal means of social well-being, 
and therefore inflicts the minimum amount of economic and 
social inconvenience. Clearly then, the extent of the surplus in- 
come is the measure of an individual's ability to contribute to 
the public revenue without injury to his own well-being. How 
then can taxes be levied so as to be drawn from the economic 
surplus of the community without disturbing industrial relations ? 
This would be a very simple problem if the taxes^ would stay 
where they are put and were paid by those upon whom they 
are levied. But this is just what does not occur. In order 
therefore, to answer this question, it is necessary to consider the 
economic mobility of taxes. 

Section II. — The Mobility of Taxes and their Relation to 

Wages, 

To ascertain how taxes travel from one to another class in the 
community, and to find by whom they are ultimately paid, we 
have only to follow a tax from where it is levied to the place 
where it cannot be further shifted. For illustration, let us sup- 
pose that a tax is laid upon land ; the land being the source of all 
raw material, such a tax would affect all commodities in the first 
stage of their production. Upon the principle that a commodity 
cannot be continuously furnished for less than it costs, the tax 
will be added to the price of the product in the same way as 
wages and other items, and must be paid by the purchaser. If 
the article is wheat, the tax is thus transferred from the far- 
mer to the miller. The tax being an inevitable item in the cost 
of the flour to the miller it is transferred by him to the wholesale 
merchant, and by him to the retail grocer, who in turn passes it 
on to the consumer. Manifestly unless the consumer can transfer 
the tax to some one else, he must pay it, because it is included in 
the price of his commodity in addition to all necessary costs. 

This brings us to the most critical point of the subject. All 
writers of any standing recognize the mobility of the tax from the 
raw material to the consumer of the finished product. But it is 
generally assumed that the tax cannot be made to travel any 
further than the commodity in whose cost it is an item, and con- 
sequently whoever consumes the article ultimately pays the tax. 



RELATION OF TAXES TO WAGES. 365 

If we examine the matter more closely, however, we shall see that 
this conclusion is only partially correct. Whether or not those 
who consume the wheat pay the tax, will depend upon whether its 
consumption forms an item in any further series of production. 
Suppose, for instance, the wheat is consumed by horses that are 
employed in a brick-yard. The wheat in that case at once be- 
comes an item in the cost of using the horse, which in turn is an 
item in the cost of the brick. This point is very important 
here, because it has a direct bearing upon whether or not the 
laborer ultimately pays the tax included in the price of the com- 
modities he consumes. 

The laborer, it should be remembered, exercises two functions 
One is social, and the other economic. As a social factor he is 
a consumer, and constitutes an important item both in civilization 
and in the market. As an economic factor, however, he is 
simply a productive force. In this capacity he affects the price 
of the product in precisely the same way as does any other force 
so employed, whether it be through the instrumentality of ani- 
mals or machinery. Economically they all affect the cost and 
price of the product in the same way, namely, through the cost 
of procuring them. The cost of any productive instrument is 
what is consumed in maintaining its productive efficiency, and 
that cost must be replenished from the price of the product. 
Now, the cost of maintaining the productive efficiency of the 
laborer is his living. Whatever is necessary to that is a part of 
the price of his labor — wages, — and therefore becomes a neces- 
sary item in the cost of whatever he produces. Clearly, there- 
fore, the more his living costs, the more expensive will be his 
labor. If his cost of living could be reduced, either by inducing 
him to consume fewer commodities or by lessening the cost of 
those he does consume, his wages could easily be lowered. The 
price of labor in Asia and continental Europe is less than in 
America because labor there costs less.^ 

For the same reason that the price of labor would fall if the 
cost of the laborer's living could be reduced, it must and will 
rise if the cost of that living is increased. Nor does it matter 
whether the increased cost is due to an increase in the amount of 

^"Wealth and Progress," Part II., chap, vii., sec. i., pp. 162-167; also 
Brassey's " Work and Wages," pp. 88, 8g, 94-96. 



366 THE LABORER SHIFTS THE TAX. 

wealth he consumes or to a rise in the price of that wealth. Thus, 
during the American war, when the price of commodities was 
greatly increased through the inflation of the currency, wages soon 
moved in the same direction and fell again when the prices were 
lowered — as, indeed^, they have throughout all history/ Clearly, 
therefore, if the price of a laborer's flour, sugar, coffee, clothing, 
and the like is increased by a tax, the result will be economically 
the same as if the higher price were due to the payment of higher 
wages to agricultural laborers, a rise in the rate of transportation, 
a failure of crops, or any other cause ; and if it becomes perma- 
nent it will result in his demanding and obtaining higher nominal 
wages. The laborer would not gain any thing in well-being by 
such a rise of wages, but it would be necessary in order to furnish 
him the amount of well-being to which he had become habitually 
accustomed, and without which he would refuse to work. In this 
way, therefore, the tax is transferred from the laborer to the em- 
ployer.^ What is true of the laborer is equally true of all who 
receive stipulated incomes. 

To whom, then, it may be asked, does the employer transfer 
the tax ? Here the answer is as before — to whomsoever he can. 
And if he cannot transfer it to anybody, he must pay it himself. 
He will of course utilize all the economic forces at his command 
to pass the tax to somebody else. He may fiirst try to make the 

1" Wealth and Progress," pp. 148-156; also McCulloch's "Principles of 
Political Economy," p. 181. 

^ This fact was recognized by the early English writers, although, like many 
others of their best suggestions, it has been subsequently treated rather as an 
incidental than a primary fact. Adam Smith says : " Such a tax must there- 
fore occasion a rise in the wages of labor proportionable to this rise of price. It 
is thus that a tax upon the necessaries of life operates in exactly the same man- 
ner as a direct tax upon the wages of labor. The laborer, though he may pay 
it out of his hand, cannot, for any considerable time at least, be properly said to 
even advance it. It must always, in the long run, be advanced to him by his 
immediate employer in the advanced rate of wages." — " Wealth of Nations," 
Book v., chap, ii., article iv., pp. 691 and 692 ; see also pp. 686, 693, 694, and 
704. Ricardo says : " There can be no permanent fall of wages, but in con- 
sequence of a fall of the necessaries on which wages are expended." — " Political 
Economy and Taxation," p. 75. "A tax, however, on raw produce and on the 
necessaries of the laborer, would have another effect — it would raise wages." — 
Ibid., p. 93. " The effect of a tax on wages would be to raise wages by a sum 
at least equal to the tax, and would be finally, if not immediately, paid by the 
employer of labor." — Ibid., p. 133 ; see also pp. 129, 136, and 141. 



TAXES DRAWN FROM THE SURPLUS. 367 

laborer pay it by refusing to increase wages, but here he will be 
met by the laborer's refusal to work, and, should he try to put it 
on the consumer in higher prices, he will only be repeating the 
circle, because the increase in the price will act as before upon 
wages, and he will have to pay out to the laborer what he has 
thus exacted from the consumer. In the last analysis, therefore, 
the only source from which the employer can pay the tax is his 
surplus or profit/ That being, as we saw in the last section, the 
true measure of the individual's ability to contribute to the public 
revenue without curtailing his own well-being, it is the most 
equitable basis of taxation. This brings us to the question how 
the employer replenishes his surplus from which taxes are finally 
drawn. 

Section III. — The Ultimate Effect of Taxation upon Profits 
and the General Wealth of the Comtnunity. 

If the conclusion reached in the last section is correct, and 
taxes finally come out of the surplus product, then it follows that 
either profits diminish as taxes increase, or that the employer has 
some means of replenishing his surplus. We know from ex- 
perience that the aggregate amount of wealth taken in taxes tends 
to increase as society advances, and it is equally certain that the 
aggregate profits do not diminish. On the contrary, while there 
is a tendency to minimize the rate of profit per unit of product, 
the aggregate amount of surplus product in various forms un- 
questionably tends to increase. Clearly, then, there must be 
some means by which the employer can replenish his surplus 
when thus drained by taxation. How does he do it ? 

We have already seen that he cannot take it from the consumer 

^ Accordingly, any extra pressure of taxation is always first felt by the business 
portion of the community in the diminution of profits. Hence we always 
find the commercial class the first to protest against excessive taxation. For 
this reason no representative government, and few despotic ones, could suddenly 
increase the taxation of the country by an amount equal to the aggregate profits 
of the community, because such an act would practically be a seizure of the total 
surplus revenue, which would, in all probability, cause a revolution that would 
destroy the government. That is why, whenever an exceptionally large amount 
is to be suddenly raised by taxes, it invariably takes the form of a loan for a long 
period, thus extending the ultimate payment of a portion of the tax to future 
generations. 



368' now THE SURPLUS IS REPLENISHED. 

by raising prices, nor from the laborer by reducing wages. That 
he does not take it from either of these sources is further shown 
by the fact that contemporaneously with the increase of taxation, 
real wages have risen and the price of commodities has fallen. 
Manifestly then, the only way the producer's surplus can be 
replenished is by a new draft upon nature through increased 
production. Nor will it be difficult to see how this takes place, 
if we bear in mind the law of prices and surplus, previously 
presented. 

Under this law, whenever productive methods are employed 
by which nature yields a greater amount of wealth for the same 
effort, all other demands upon the product being fixed amounts, 
the whole gain naturally flows to the contingent surplus of those 
who use the new methods. Consequently, all increase in the 
wealth of any stipulated income class in the community, whether 
it be through lowering prices or increasing wages, must be drawn 
from the contingent surplus of the producers. For instance 
when, by the adoption of more productive instruments, the sur- 
plus of the most successful producers increases, there arises a 
greater inducement to invest more capital in the enterprise, and 
thus increase production. In order to insure the sale of this 
increased production, it is offered at a lower price. If this 
reduction be ten per cent., the uniform price of the total product 
in that market will fall ten per cent. Manifestly this fall comes 
directly out of the profits of the producers, and all who were 
previously making less than ten per cent, profit will now have to 
leave the business or adopt the methods by which the reduction 
was brought about. Thus the additional wealth resulting from 
the increased productive efficiency first flows to the economic 
sifrplus of those producing the improvement, and then by com- 
petition, is transferred from the producers', surplus to the com- 
munity in lower prices. 

An increase of wages takes place upon the same general 
principles, and with substantially the same result, but it comes 
in a somewhat different way. A reduction in prices is a distri- 
bution of the surplus through the aggressive action of employers. 
An increase of wages is a distribution of the surplus by the 
aggressive action of laborers. As already explained, the enforced 
transfer from profits to wages compels the producer either to 



TAXES INCREASE PRODUCTION. 369 

work without profit, or perhaps at a loss, or to adopt some 
labor-saving means by which more can be produced at the same 
cost. Thus the laborer's encroachment upon the capitalist's 
surplus forces him, under penalty of poverty, to make nature 
yield more wealth for the same effort, thus replenishing what 
the laborer has taken from him, and making the community 
absolutely richer by the amount to which wages have been 
increased.^ 

What is true of wages is true of any other form of increased 
consumption which adds to the cost of production. Taxation is 
precisely of this character. If 10 per cent, is added to the price 
of wheat or cotton by a tax, the mobility and ultimate economic 
effect upon profits and production will be identically the same as 
if 10 per cent, had been added to the cost by an increase of 
wages. The same economic power which would enable the 
farmer to add to the price of wheat an increase in the farm 
laborers' wages, and the miller, wholesale and retail merchant, 
each in turn to add it to the price of flour, and the mechanic, 
who consumes the flour, to add it to his wages, and thus ultimately 
take it from the employers' profits, will enable them to do pre- 
cisely the same by a tax which increases the cost of production 
in the same way, no matter at what stage of the process it is 
levied. Taxation, like wages, is simply a form of consumption, 
and hence exercises the same influence upon profits and the 
general wealth of the community as any other form of consump- 
tion — namely, to increase the aggregate production, which added 
increment goes to replenish the source from which the tax was 
last taken — the employer's profit. 

It will thus be seen that the entrepreneur does not pay the 

tax, in the sense of being permanently the poorer by it, any more 

than does the farmer, miller, merchant, or laborer. They each 

shift it on to the next purchaser of the product into whose cost 

it has entered. In the laborer's case, having become a part of 

the cost of his labor, it is charged to the employer in the same 

way. The employer, being unable to charge it upon any class 

of his fellow-men, is forced, by the impulse of self-interest, to 

exact it from nature, which he finally does in the form of a larger 

product. Therefore Professor Sumner's statement that " every 

^ Part II., chap, v., sec. iii. Also " Wealth and Progress," pp. 31, 32. 
24 



370 IMPORTANCE OF TAXATION EXAGGERATED. 

tax is an evil " is essentially false. A tax is not necessarily an 
evil any more than wages or any other form of consumption.^ 

It will thus be seen that taxation properly occupies no such 
important position in economics as is usually ascribed to it. If 
the total consumption upon which the $300,000^000 of taxes in 
this country is expended were abolished to-morrow, instead of 
adding to our wealth, it would create an industrial depression in 
this and probably in several other countries, until, by enforced 
idleness and bankruptcy, production could be readjusted on the 
narrower basis to conform to the diminished consumption or 
demand. Were this relation of consumption to production prop- 
erly' understood, taxation would cease to be the hobgoblin of 
public affairs. The important question regarding taxation is not 
as to who shall pay the taxes, nor how much they shall be, but as 
to how they shall be expended. If a large amount of wealth 
is exacted from the community in taxes, and is squandered, then 
there would be no justification for a readjustment of economic 
relations which its production involves. If the tax revenue is 
used to repress any phase of social progress, as would be in 
maintaining a standing army, it is then a positive injury. Only 
when the wealth created by tax is used to further the social 
development of the people has it any economic or ethical justifi- 
cation. Upon what principle, then, should the public revenue 
be expended in order to justify its collection ? 

Section IV. — The Legitimate Sphere of Public Expenditures, 

Since the public revenue is but the means by which government 
fulfils its functions, its expenditure is necessarily limited to the 
sphere of governmental action. We have already seen that the 
functions of government are &'&^tn\\zW.y protective Judiciary, educa- 
tional^ and impersonal in their character. Clearly therefore, the 
sphere of public expenditures is properly limited to the promotion 
of those objects which may be conveniently grouped into two 
classes as the Static and the Dynamic functions of government. 

^ Whether or not a rise of wages or an increase of taxation will be beneficial 
will depend largely upon how it is expended, and this, in turn, will depend 
upon the influences by which it was brought about, but, in any event, it will 
cause an increase in production. 



TWO FUNCTIONS OF GOVERNMENT. 37 1 

The static functions embrace all that is necessary to secure the 
community against a common enemy and to enforce the recog- 
nized system of social order as expressed in established institu- 
tions. This may require a large army, an extensive police force, 
and a numerous staff of judiciary and executive officers. The 
means necessary to sustain these instruments of public order 
should be supplied from the public revenue, for the obvious 
reason that it is the function above all others which can be best 
performed by the government, and without which it would be 
impossible for the individual to perform with safety and freedom 
any of the industrial and social duties of a civilized citizen. All 
expenditure for this purpose represents the price that civilization 
has to pay for guarding itself against the effects of barbarism, and 
should be reduced as rapidly as possible. 

To accomplish this reduction involves the exercise of the 
dynamic functions of government. These relate to increasing 
the opportunity for developing all phases of individual capacity 
and freedom. Opportunity, as the term is here employed, is 
distinctively educational in the broadest sense of the word. Every 
thing is educational that brings man into more frequent contact 
with an increasing variety of social influences which tend to stimu- 
late his wants and desires, sharpen his intelligence, and actualize 
the latent possibilities of his character. This embraces not only 
the elementary education furnished by the common school, which 
is of prime importance to citizenship, but it also includes the 
furnishing of clean, wholesome streets, good drainage, ventilation, 
and other sanitary requisites to wholesome domestic life, an abun- 
dance of public parks, gardens, museums, free lectures, reading- 
rooms, circulating libraries, and, above all, the leisure necessary 
to enable the masses to avail themselves of these and kindred 
educating and elevating influences. To the extent that these 
opportunities are increased will the intelligence and character of 
the citizen be elevated and the functions of the soldier, policeman, 
judge, and jailer become unnecessary. Consequently, to the 
extent that the public revenue is expended in performing the 
dynamic functions of the state will the amount required to 
perform the static functions diminish. This is the more import- 
ant because every dollar that is consumed by the government in 
exercising its static functions involves so much production 



372 • PUBLIC IMPROVEMENTS, 

without any real increase in well-being, — it being all consumed in 
guarding what already exists. On the other hand, every dollar 
expended by the state in performing its dynamic functions 
involves an increase of production, all of which is a net gain in 
social well-being. 

Therefore, instead of treating all taxes as an evil to be dimin- 
ished, it is only the amount of the public revenue consumed by the 
government in performing its executive and police duties that 
can properly be so regarded. All that is consumed in extending 
the socializing opportunities of the people is a positive benefit 
and should be increased, especially as the increase of the latter is 
the surest way of diminishing the former. To oppose an increase 
of taxation for public improvements, in the name of economy, is 
a fallacy which cannot be too frequently exposed. It is just as 
important to have clean streets as to have clean houses, and the 
wealth consumed in the one contributes to civilization as much 
as that consumed in the other. The only question to be con- 
sidered regarding such expenditures, is whether or not they can 
be more efficiently conducted by the government than by private 
individuals.^ But that the wealth so consumed should be 
increased is sustained by all the interests of civilization, and 
those who oppose it are unconsciously or otherwise obstructing 
the movement of social progress as surely as those who oppose 
popular education and favor long hours of labor and low wages. 

Section V. — How can Taxes be Most Equitably Levied^ 
Conveniently Paid, and Economically Collected? 

This proposition involves two questions : (i) How taxes should 
be levied. (2) What they should be levied upon. 

I. There are two general methods by which the public revenue 
can be obtained — direct and indirect taxation. It is a peculiar 
feature in the history of taxation that those who are charged with 
the responsibility of raising the revenue and with the administra- 
tion of government, usually prefer to obtain the revenue through 
indirect taxation. On the other hand, revenue reformers and 
social reformers generally advocate direct taxation. 

Direct taxation is urged in preference to indirect, chiefly on the 
^ See Part IV., chapter ii., section iii. 



DIRECT TAXATION, 373 

ground that a tax is an evil which should always be minimized, 
and that if taxes were collected directly from the individual 
he would then realize how much he paid, and would therefore be 
more strenuous in his demands for a retrenchment of the public 
revenue. They insist that indirect taxation is simply a cunning 
device for making the citizen contribute to the public revenue 
under the guise of purchasing the necessaries of life, thus obtain- 
ing wealth from the individual which he would otherwise refuse 
to contribute. This position is based upon two assumptions : 
(i) that taxes are necessarily an evil to be minimized ; (2) that 
direct taxation affords each individual an opportunity of correctly 
estimating the amount he contributes to the public revenue. 

In the first place it is an entire mistake to regard taxes as neces- 
sarily an evil. We have already seen that they simply represent 
the consumption of wealth in a public form, and have the same 
economic effect upon production, industry, and commerce gener- 
ally, as does private consumption. And whether or not private 
or public consumption will be permanently beneficial to the com- 
munity depends upon how such consumption takes place. To the 
degree that wealth is consumed in extending public improvements 
and enlarging the social opportunities of the people, it is both 
economically and socially a positive advantage. The assumption 
therefore that taxes are at best a necessary evil is not only 
erroneous in fact, but it is extremely mischievous in its effect, 
as it inspires opposition to expenditures for public improve- 
ments. 

Nor is the idea that direct taxation enables each individual 
accurately to determine the amount he contributes to the public 
revenu-e any nearer correct. This is another of the numerous 
errors arising from a misconception of the law of wages. From 
what has already been said it will not be difficult to see that a 
direct tax upon the individual is just as mobile as an indirect tax 
levied upon the commodities he consumes. If a merchant can 
transfer a tax upon flour to the consumer, because it adds to its 
cost to him, he can also transfer to the consumer a tax upon his 
house or his horse for the same reason. 

The same is true of the laborer. A direct tax upon his house 
or his wages or any thing in his possession, is simply so much 
addition to the cost of his living, and can be transferred through 



374 EVILS OF DIRECT TAXATION. 

higher wages to the employer in precisely the same way as is his 
house rent, and the cost of his food, clothes, and other necessaries 
of life/ In many parts of England the different classes of local 
expenditure such as the " poor's rate," the " cemetery rate," the 
" highway rate," the " water rate," the " local-board rate," etc., are 
collected directly from each householder by the tax-gatherer 
in separate items, and often by different persons. These rates 
however, enter into the cost of the laborer's living, and have to be 
covered by his wages just as much as the amount of his grocery 
bill or his house rent, and are everywhere so recognized.^ Where 
the rates and rents are high, as in London and other large centres, 
the wages in all industries are correspondingly higher than in 
localities where these items are low, which is one of the reasons 
why wages are always higher in large cities than in small towns 
and rural districts.^ The economic mobility of a tax is in no- 
wise affected by the fact that it is directly or indirectly collected. 
Whether the taxes are gathered directly from the laborer in a 
specific sum, or indirectly through the enhanced price of com- 
modities, makes no real difference. In either case it enters into 
the cost of his living and the price of his service, and hence is 
ultimately transferred to the employer. Instead, therefore, of 
direct taxation enabling the laborer accurately to determine the 
amount he pays to the government, it has the opposite effect, and 
he is deluded into the belief that he is heavily burdened by pub- 
lic expenditures, whereas he actually contributes nothing except 
temporarily during periods of readjustment. 

Moreover, the effect of direct taxation is pernicious in many 
ways. In the first place it creates a strong incentive for evading 
taxes, which is a standing inducement to dishonesty. So long as 
men believe that they are permanently impoverished by what 
they pay into the .public treasury, they will endeavor to devise 

^ " Wealth of Nations." 

2 So manifest is this that where whole classes of laborers have to ride to and 
from their work, as in London and other large cities, the price of their fare is 
recognized as a proper cause for demanding higher wages, and in other districts 
where the employer furnishes the laborer's house rent-free, or the privilege of 
keeping a cow, etc., it is equally regarded as a legitimate reason for paying 
lower wages, and in such cases wages always are lower. 

^ "Wealth and Progress," Part II., chap. vii. 



PROPERTY AND INCOME TAX. 375 

means to elude the tax-gatherer ; the " tax-dodger " is a well- 
known character/ In the next place direct taxation creates a 
strong feeling of dissatisfaction among the different classes in 
the community as to the justice or injustice of taxing or not 
taxing different classes of property. Hence the interminable 
controversy as to whether or not workingmen's homes should be 
exempt from taxation. It is held to be unjust to tax the work- 
ingman's home because that would be putting the burden upon 
those who are least able to bear it. But if they are to be exempt, 
at what point should the exemption be fixed ? To exempt home- 
steads at a given valuation would tend to encourage the building 
of houses within that valuation limit ; and that would be a decided 
injury, because it would act as a check upon the building of 
superior houses, and hence tend to stereotype inferior domestic 
conditions. 

Again, whether or not all personal property should be taxed, 
and if not what kind should be exempt, is another point of con- 
tention. Some insist that productive property should not be 
taxed, because such taxation discourages industry, while others 
contend that to tax non-productive property is unjust, since it 
yields no income. And certain it is that every attempt to tax 
personal property encourages systematic misrepresentation and 
other fraudulent practices too numerous to recite.^ 

The same is true of income tax. This tax is assessed on the 
assumption that it draws the revenue from surplus incomes which 
would otherwise escape taxation. But when it is understood that 
in the normal course of economic movement all taxes are finally 
drawn from the surplus product, the force of such reasoning 
entirely disappears. So far from direct taxation being the model 
method of raising public revenue, therefore, it is essentially un- 
economic and demoralizing. It involves the maximum incon- 

1 In Boston for instance it has become an estabhshed practice among a large 
number of rich men to temporarily reside in Nahant, a small town a few miles 
from the city, where the local taxes are very light. By living there on the first 
of May, when assessments are made, they are taxed for Nahant instead of 
Boston, While they actually live in Boston, and obtain all the advantages of 
the large public expenditures there, they are only taxed according to the trifling 
expenditure in Nahant. 

2 See Prof. E. R. A. Seligman on " The General Property Tax," Political 
Science Quarterly^ March, 1890. 



37^ INDIRECT TAXATION. 

venience, puts a premium on dishonesty, and tends to make the 
average citizen a persistent enemy of public improvements, 
without affording any compensating advantages. In short, direct 
taxation is defensible only in cases of exceptional emergency 
such as wars/ and even then but for the briefest period pos- 
sible. 

Since the public revenue must be directly or indirectly col- 
lected, it follows that all the reasons for objecting to direct 
taxation obtain in favor of the indirect. While it is highly 
important that the individual should always be fully informed 
regarding real burdens, it is quite as important that he be not 
deluded into assuming imaginary ones. Since the public con- 
sumption represented by taxation is not a permanent burden 
upon any class in the community, the public welfare demands 
that taxes should be so levied as not to have that appearance. 
Consequently, instead of making taxes as direct as possible, 
thereby giving them the most burdensome seeming, they should 
be levied with the greatest indirectness, so as to be as impercepti- 
ble as possible. To the extent that the individual ceases to be 
conscious of his contribution, and its exact amount becomes 
difficult to determine, will the incentive for the various forms of 
dishonesty and corruption for evading taxation disappear. And 
when an important public improvement is proposed which in- 
volves a large expenditure, the decision of the average citizen 
regarding it will be less likely to be neutralized by the feelings ol 
his own inability to contribute his share. By removing this con- 
scious personal element, the question of taxation will be considered 
solely with regard to its effects upon the community, thus removing 
one of the greatest obstacles to public improvements. With this 
view of taxation, all public expenditures of a protective, educa- 
tional, opportunity-creating character (judiciously applied) would 
be regarded as an actual addition to the wealth of the community, 

^ The only reason for adopting direct taxation in case of war is that the surplus 
income is reached quicker by that means, but it is far more inconvenient and 
arbitrary ; and even in such cases it is more economic to borrow the necessary 
amount and let it be finally repaid out of the revenue indirectly collected. 
When it is thus furnished through the normal operation of economic law, it 
tends gradually to replenish the surplus from which it is drawn by increased 
production, and thus minimize, if not indeed obviate, the burden upon the com- 
munity. 



ADVANTAGES OF LAND TAX. 3/7 

to be increased, instead of as at present being treated as a burden 
to be avoided at every turn. 

2. Upon what class of property should taxes be levied is the 
question that remains to be considered. The important point to 
be considered in determining the class of property upon which 
taxes should be levied is how to obtain the greatest indirection 
of movement with the least cost of collection. 

Manifestly a tax will have the greatest indirection of movement, 
and hence be most completely subject to economic law which 
passes through the largest number of hands and enters into the 
greatest variety of productive processes. To give a tax the 
greatest indirection, therefore, it must be levied at the point 
farthest removed from those by whom it will be finally paid. 
Since all taxes are finally drawn from the surplus product, they 
would necessarily be most direct when levied upon profits or 
other surplus, and conversely most indirect when levied upon 
the source of raw material. Upon the same principle that a tax 
upon surplus incomes cannot be shifted to any other class in the 
community, because it does not enter into the cost of production, 
a tax on raw material can be shifted in a multitude of ways before 
reaching any class of consumers, because it all enters into the 
cost of production, and becomes an indistinguishable part of the 
price of commodities. Clearly then, the greatest indirection 
would be secured by imposing a tax on real estate, especially 
on land. A tax upon land would of course be an addition to the 
cost of producing every species of wealth in the community. 

It is equally clear that a tax upon real estate would be the 
most easy and inexpensive to collect. In the first place, it is 
the form of property that is most accessible, it cannot be con- 
cealed from the eye of the assessor ; hence it affords the least 
temptation for tax-dodging, or other dishonorable means of 
evasion. It is also the class of property whose value is most 
easily ascertained, because it is most frequently and permanently 
in the open market for sale or rent, either fact furnishing the basis 
for ascertaining its current value at any given time. This form 
of property has the further advantage of being immovable. The 
owner may leave the city, State, or country, but the real estate 
remains as accessible as ever. Another advantage in this form 
of taxation is that it avoids all the objectionable inquisitorial 



3/8 EQUITABLE NATURE OF LAND TAX. 

features involved in all direct, personal, and property taxes. 
There is no other form of property in society upon which taxes 
can be so easily and accuratel}^ assessed, so cheaply collected, and 
with as little intrusion upon the freedom of the citizen. 

Nor can there be any complaint that such a tax would press 
unduly upon the landowner, because, so far as the income from 
the land represents the cost of service rendered in using it for 
productive purposes, the tax will all come back in the price 
of the product ; and only that portion of the tax which falls 
upon the surplus as rent, interest, and profit will be untransfera- 
ble and finally paid by the landowner, the equity of which no 
one can question. Nor can any legitimate complaint be made by 
those who advance the tax at any of the subsequent stages. In 
every case, so far as it affects the cost of economic production 
either in the form of the cost of raw material, tools, labor, or any 
thing whatsoever, it can be added to the price. Neither could 
there properly be any complaint about the personal wealth of the 
rich escaping taxation, because the tax having been laid at the 
source of economic movement, its full amount is included in the 
price of every thing they buy. Hence their only means of suc- 
cessfully avoiding taxation would be to forego consumption, 
which is to relinquish wealth and civilization. If taxes were 
thus levied, the rich jewelry, wardrobes, furnishings, and equi- 
pages of the wealthy would all carry their quota of taxation, and 
so far as they represented the stock of the manufacturer or 
merchant, or were included in the necessary cost of living of any 
who render productive service, the tax included in their price 
would be transferable as in all other cases ; that portion of these 
forms of wealth only which was supplied from surplus income 
would have finally to bear the tax. There certainly could be no 
justice in making an article, which has already borne its full 
quota of taxation in its economic journey to the consumer, yield 
a fresh tax each year after it leaves the sphere of economic move- 
ment. Such a tax must necessarily act as a direct check upon all 
new forms of consumption, especially among the wage- and salary- 
receiving class, and thus be positively inimical to the development 
of a high standard of living and social progress. 

It will perhaps be objected that if taxes were all levied on real 
estate, and acted as an increase in the cost of raw material, the 



OBJECTIONS ANSWERED. 3/9 

tax would fall the heaviest on those articles containing the largest 
amount of raw material. And since food and the coarser manu- 
factured products consumed by the masses contain a mucii larger 
proportion of raw material than the finer products of manufacture 
and art consumed by the wealthy, the tax would fall much more 
heavily upon the poor than upon the rich. This is an objection 
which can be easily answered, if we bear in mind the law govern- 
ing the mobility of taxes. It is true that in high-priced jewelry, 
pictures, books, and indeed the finer products of manufacture 
and art, the raw material forms the most insignificant portion of 
the cost. And if the tax represented in the price of such articles 
was limited to what is conveyed by the cost of raw material, it 
would indeed be very slight. The fact is, however, that the tax 
in such products enters mainly through the labor. Although the 
tax-bearing raw material in these products is very slight, that 
represented in the laborer's wages, which includes all that enters 
into his living, is very great, and as the high price of such prod- 
ucts is largely made up of the cost of labor, they bear the tax 
levied upon all the raw material consumed by the laborer. The 
tax, therefore, in the finer products of manufacture and art will 
not be proportionate to the raw material they actually contain, 
but to all the raw material that has been consumed by every thing 
used in producing them. In other words, their contribution to 
the public revenue will be proportionate to their value as finished 
products, and therefore they represent the greatest instead of the 
least tax-transmitting power. 

Another objection that will probably be urged against this 
position is, that a tax on raw material has the effect of adding to 
the price of the product not only the tax but also the profit upon 
the tax to those who advance it. This view has long been held 
by leading English economists.^ According to this view, every 
time a tax is transferred it carries with it an added increment of 

^ Adam Smith says : "A tax upon those articles necessarily raises their price 
somewhat higher than the amount of the tax, because the dealer who advances 
the tax must generally get it back with the profit. . . . His employer, if 
he is a manufacturer, will charge upon the price of his goods this rise of wages 
with a profit, so that the final payment of the tax, together with his overcharge, 
will fall upon the consumer." — "Wealth of Nations," Book V., chap, ii., 
article iv., pp. 691, 692. 



380 MILL'S ERROR, 

profit. Consequently, if it is transferred encJugh times, the amount 
of profit which is added to the consumer's price of the finished 
product by the tax will be greater than the tax itself. This doc- 
trine is a logical part of the orthodox theory of profits, according 
to which the normal profits of the capitalists form a necessary 
part of the cost of production, and hence of the price of commo- 
dities. In stating this theory. Mill says : " And profit, we have 
also seen, is not exclusively the surplus remaining to the capitalist 
after he has been compensated for his outlay, but forms, in most 
cases, no unimportant part of the outlay itself." And after enu- 
merating a long series of processes, in which the profits of each 
are compounded in the next, he adds : " All these advances 
form a part of the cost of production of linen. Profits, therefore, 
as well as wages, enter into the cost of production which deter- 
mines the value of the produce." ^ Were this doctrine correct, 
it would certainly form an unanswerable objection to all indirect 
taxation, and indeed to indirect production also. Since every 
specialization and division of labor adds to the series of distinct 
profit-yielding processes, industrial improvements would serve to 
increase the power of the capitalist to add compound profit to the 
consumer's price of commodities. 

Fortunately for civilization, however, economic law permits no 
such compound profit-making process. We have already seen 
that the price of the product in a given market tends to a 
uniformity on the basis of the cost of furnishing the dearest 
portion.^ Consequently the profits of each producer can only be 
equal to the difference between his cost of production and that 
of those furnishing the dearest increment of the general supply, 
this increment being sold without profit. It is impossible there- 
fore in any market, or at any stage of the productive process, to 
add the producer's profit to the consumer's price, since competi- 
tion compels all who contribute to the same market to sell at the 
same price, which price is fixed by the cost of the no-prolit produc- 
ers. Consequently, if there is any profit, it must be obtained from 
nature through greater economy in production. It will thus be 
seen that the claim that taxes upon land or raw material must be 
repaid with a profit to those who pay them, is a pure phantom 

^ " Principles of Political Economy," vol. i., p. 568. 
2 Part II., chap, iv., pp. 125-128. Cf. pp. 205, 206. 



POPULAR DELUSION. 38 1 

which entirely vanishes in the light of the true law of economic 
prices, and with it disappear all the objections to indirect taxa- 
tion, based upon adding compound profit to consumers' prices. 

It will be seen that the question of taxation is much less funda- 
mental than it Is usually made to appear. Like the question of 
money, it is frequently employed to influence public opinion on 
a multitude of questions on which It has practically no bearing. 
Taxation is simply the consumption of wealth in a public form, 
and has no more economic effect than the same amount of wealth 
privately consumed. The only interest therefore the community 
has in the question is that the taxes shall be economically col- 
lected and wisely expended. If this fact is once clearly under- 
stood, the misconceptions In which the subject has been involved 
will disappear. Then the popular delusion that all taxes are 
finally paid by the laborer would lose its political utility, and the 
equally erroneous notion of Henry George, that to levy all taxes 
on land-values would abolish poverty and establish universal 
freedom, would at once be recognized as a mere social mirage. 
The only advantage in levying taxes upon land and real estate In 
preference to incomes and personal property is that the revenue 
can be collected from the former with greater ease, certainty, 
and convenience. 



CHAPTER V. 

BUSINESS DEPRESSIONS. 

Section I. — Economic Characteristics of Business 
Depressions. 

There are few questions upon which a greater variety of 
opinion exists than business depressions. They are ascribed to 
a different cause in every country, and often to as many different 
causes in the same country as there are phases of social reform, 
political parties, sectional or industrial interests.^ Before any 
intelligent understanding of the cause of these social calamities 
can be obtained, it will be necessary to consider their economic 
peculiarities, and the industrial or other conditions under which 
they occur. 

The first general characteristic of business depressions is that 
they are periods of exceptional industrial adversity. But there 
are two kinds of industrial adversity, whose characteristics and 
causes are widely different ; these are famines and business de- 
pressions. A famine is an actual scarcity of consumable wealth ; 
a business depression, on the contrary, is a relative plethora of 
consumable wealth. The first symptom of a famine is the failure 
to produce a sufficient amount of wealth to meet the existing de- 

^ The business depressions of 1873-1878 were attributed to over two hundred 
different causes by the various economists, capitalists, philosophers, and re- 
formers, who testified before the Congressional Committee to investigate the 
subject. See reports of the Wright and Hewitt Congressional Committees on 
" Industrial Depressions," also the report of the United States Senate Com- 
mittee on " Education and Labor," 1885, and the report of the Commissioner 
of Labor on "Industrial Depressions," 1886. Also report of Royal Commis- 
sion (England, 1885) on the " Cause of Industrial Depressions." 

382 



DEPRESSIONS, FAMINES, AND PANICS. 383 

mands of the community ; while the first indication of a business 
depression is the failure to find sufficient customers to carry off 
the existing supply of commodities. The economic distinction, 
therefore, between a famine and a business depression is that the 
former springs from a scarcity of commodities and the latter from 
a scai'city of consiwiers. 

Nor do famines and business depressions both occur in the 
same countries. India, Egypt, and other less civilized countries, 
have frequently suffered severely from famine and consequent pes- 
tilence, as did also Europe during the Middle Ages, — thousands, 
and sometimes millions, died of hunger and disease,^ — but they 
have no business depressions. America and the leading countries 
in Europe no longer have famines, but they have business depres- 
sions. Famines and business depressions are not only economi- 
cally distinct, and occur in different countries, but the very 
conditions which promote the one tend to prevent '.he other. 
The very specialization of industry and development of science 
that have steadily diminished the possibility of famines, have 
brought into existence involved commercial relations and the 
factory system which make business depressions possible. Nor 
must business depressions be confounded with financial panics ; 
these are disturbances of another kind. A money panic may 
arise in the midst of business prosperity as at present (1890). 
Although, like any other social disturbance, a financial panic has 
a harmful effect upon the industrial community, it being purely a 
fiscal disturbance the evil effect is largely restricted to the specu- 
lative class. A money panic may be the final straw which reveals 
a business depression, but if the consumption of commodities is 
practically equal to the production it cannot produce one. Busi- 
ness depressions, therefore, may be characterized as periods of 
industrial adversity peculiar to machine-using countries, and 
arise from a failure to sell and never from an inability to produce 
consumable wealth. 

Another characteristic of business depressions is that they are 
not local or even national in their movement, but that they occur 
with striking uniformity in all countries in which they occur at 
all. This will be seen by the following table, which shows the 

* Mr. Cornelius Walford, F.I.iV,, F.S.S., in a paper published in the Sta- 
tistical fournal, vol. xli., gives the history of 350 famines. 



3^4 



HISTORY OF DEPRESSIONS. 



recurrence of business depressions in England, France, United 
States, Germany, and Belgium during this century.* 

Germany. Belgium. 



ngland 


France. 


United States 


1803 


1804 




1810 


1810 


.... 


1815 


1813 


1814 


1818 


1818 


1818 


1826 


1826 


1826 


1830 ■ 


1830 





1837 


1837 


1837 


1847 


1847 


1847 


1857 


1856 


1857 


1866 


1866 


1867 


1873 


1873 


1873 


1883 


1882 


1882 


1885 


1885 


1885 



1837 


1837 


1847 


1848 


1855 


1855 


.... 


1864 


1873 


1873 


1882 


1882 


1885 


1885 



By this table three facts are clearly indicated : (i) That busi- 
ness depressions are limited to machine-using countries beginning 
in England with the rise of the factory system. (2) That they 
have steadily extended to other countries as fast as factory 
methods of production have been adopted ; that is to say, as 
fast as they became manufacturing and commercial countries. 
(3) That business depressions have been practically uniform 
and international in their movement, and that all countries with- 
out regard to form of government, political institutions, physical 
or climatic peculiarities, when once afflicted are visited with 
every recurrence and almost simultaneously. With these facts 
before us regarding the nature and history of -business depres- 
sions, we are in a position to intelligently consider the causes 
from which they arise. 

Section II. — Cause of Business Depressions. 

In order to warrant the conclusion that any circumstance is 
the cause of succeeding phenomena, it is at least necessary: (i) 
that it should be adequate to produce the effect ; (2) that it 
sustain some necessary relation to it. In seeking the cause of 
business depressions therefore, we must first eliminate from the 
problem all influences which are clearly insufficient to produce 
them. Among the hundred or more specific causes assigned for 
^ First Annual Report of U. S. Commissioner of Labor, p. 290. 



CAUSES ASSIGNED. 385 

the business depression of 1873 in this country were excessive 
speculation in railroads and real estate, inflation of the currency, 
high protective tariff, and the unng.tural stimulus given to industry 
by the war/ But when we observe that none of these things 
occurred in England, and that still the industrial depression was 
as severe there as here, it becomes clear that these causes were 
insufficient to explain the facts. So too in the case of France. The 
fact that at the close of the war in 1872 France was compelled to 
pay an indemnity to Germany of five millards of francs in gold, 
appears at first sight to furnish a sufficient reason why she should 
have experienced a state of severe business depression and 
poverty in 1873. But when we observe that the depression was 
just as severe and protracted in Germany, where this colossal 
indemnity was received, as in France, from whom it was exacted, 
the virtue of this explanation disappears. Its inadequacy be- 
comes still more apparent when we remember that although 
none of these circumstances existed in England, Belgium, and 
America, they all had business depressions equally severe and 
protracted. The same is true of causes assigned for the 
depressions of 1882 and 1885.^ Without entering further into 
I details regarding this class of causes then, we are abundantly 
warranted in rejecting them as wholly inadequate to account for 
the phenomena. 

To what cause then can business depressions be attributed ? 
A business depression can never occur unless the equilibrium 
between consumption and production is disturbed in such a 
manner as to result in a diminution of consumption as compared 
with production. The first symptom of an approaching business 
depression is the inability of producers to find customers for their 
whole product at remunerative prices. Manufacturers will con- 

^ " There had been a period of excessive speculation, especially in railroads 
and real estate, large failures following that of Jay Cooke, inflation of the cur- 
rency, high protective tariff, large immigration, and the unnatural stimulus 
given to industry by the war, brought the monetary affairs of the country to a 
crisis, resulting in general distrust, fall of prices, apprehension, and all the train 
of evils which follow such crises." — " First Annual Report of the Commissioner 
of Labor," 1886, p. 60. 

^ For the cause of the depression in 18S2 see " First Annual Report of the 
Commissioner of Labor," p. 76, and for a summary of the causes and remedies 
recommended, see ibid., pp. 291-293. 
25 



386 THE REAL CAUSE, 

tinue to produce wealth and will prosper so long as they can find 
a remunerative market for their wares, even though wars rage or 
governments are overthrown. Production being but the economic 
response to consumption, it is to the influences which effect con- 
sumption that we must look both for the cause and cure of business 
depressions. Nor is this all. Since business depressions are 
peculiar to factory conditions, and the market for factory-made 
products depends chiefly upon the consumption of the laboring 
classes, it follows that it is the failure of the laborers' consump- 
tion to keep pace with the capitalists' production — the failure of 
the home fo grow as fast as the factory — that really produces 
business depressions. Here then we have a cause that is both 
adequate to produce the effect and necessary to it. So long as 
the consumption of the masses — i.e., the wage- and salary- 
receiving class — increases commensurately with the productive 
capacity of the community, nothing can create a business depres- 
sion ; and whenever this does not occur nothing can prevent one. 

Why does the laborers' consumption periodically fall behind 
the capitalists' production ? Is it a necessary part of the present 
productive system, or is it merely incidental to it ? The essential 
features of capitalistic production are specialization of labor, 
concentration of capital, and the use of factory methods. As 
already pointed out, these are essentially socializing in their in- 
fluence ; hence, instead of being inimical to the growth of the 
laborers' consumption, they are characteristically favorable to it. 
This is also shown by the fact that all phases of social progress 
have advanced more in a single century under the factory or 
capitalistic regime than in any previous period of the world's 
history. And it may be added that this progress has been 
greatest in those countries where the factory system has most 
completely prevailed. Witness this country and England, as com- 
pared with the countries of Asia and Africa. 

There is another feature of this industrial regime, however, 
which should not be overlooked. In proportion as the factory 
system improves economically, it tends to make the laborer more 
and more a specialist of some particular part of the finished 
product. Thus, the manufacture of a shoe is now divided into 
nearly seventy specified occupations, and cotton manufacture into 
eighty-six. In proportion as the laborers' employment is thus 



PHASES OF FACTORY SYSTEM, 387 

specified, the speed and quantity of machinery is increased, and 
the strain upon his physical and nervous energy intensified. 
With this concentrating and specializing tendency the piece- 
work system has been generally established, which places the 
laborers in severe competition with each other, and often results 
in overdoing/ Again, the use of improved machinery and the 
specialization of labor tend to diminish the necessity of a high 
degree of skill in the laborer. This leads to the employment of 
a large number of women and children in all branches of manu- 
facturing industries ; and, like the men, they too are forced to be 
automatic factors, their portion of the work being an indispensable 
part of the whole productive process. They have to labor the 
same number of hours, under the same constantly increasing 
strain and pressure, and under the same sanitary conditions as 
the men. The obvious effect of all this is to deaden the springs 
of ambition and check the growth of new desires and superior 
tastes and habits of life. The laborer whose energies are ex- 
hausted in the workshop is naturally impervious to more ele^ 
vating and refining influences. His leisure moments find him 
physically tired, mentally dull, and hence morally and socially 
indifferent. The inevitable tendency of this is to cause him to 
gravitate towards the saloon rather than the reading-room, 
lecture-hall, or theatre for his instruction and entertainment. 
Persons who are subjected to such continued toil from child- 
hood up, in the foul air of mines and the sweltering heat and 
stifling atmosphere of mills and factories, cannot be expected to 
develop the ambition and force of character necessary to inspire 
and elevate their domestic and social life. The effect of such 
conditions upon women and children is even more damaging 
than upon men. The employment of women, especially wives 
and mothers, in the factory tends to sap the very source whence 
the springs of social character arise. Just in proportion as 
woman is transferred from the home to the workshop is her in- 

' So general is thi's that in nearly all factory employments it is necessary to 
have a large number, often 5 or 10 per cent., of spare hands, or substitutes, who 
take the place of those who are compelled to be absent a day or two at a time 
through sickness, or for a rest to prevent sickness, etc. It is not an uncommon 
thing for this, in a large proportion of cases, to average as much as one day in 
a week. 



388 ARREST OF CONSUMPTION. 

spiring, socializing, and humanizing influence in the domestic 
circle destroyed — a condition that will inevitably result in stereo- 
typing the social life of the masses, and in checking the increase 
of their wealth-consuming capacity. 

This relative diminution of consumption soon begins to show 
itself in the accumulation of the merchants' stock, which reacts 
upon the manufacturer, first in diminished orders for his product, 
then in a severe competition among producers for the contracted 
market, in which the smaller concerns are compelled to close, 
finally creating among the laborers enforced idleness, the most 
powerful factor of all in promoting business depressions. When 
the laborer ceases to have employment he practically ceases to 
be a consumer ; for although in modern society he is not per- 
mitted to starve, he has necessarily to be supported by others, 
either in the form of indebtedness or charity. There is no one 
cause by which the aggregate consumption of the community is 
so rapidly diminished as by enforced idleness. Like a coiitagious 
disease, it rapidly increases its own power for evil. The actual 
restriction of the market resulting from enforced idleness still 
further limits the sale of commodities, rendering production un- 
profitable ; this again results in suspending production and in 
further discharges, inevitably culminating in a business depres- 
sion in which, through bankruptcy, the large capitalists absorb 
the smaller ones, and are thus enabled to wait till the lagging 
consumption again overtakes production. Every such ruinous 
adjustment is a temporary arrest of progress, and the more fre- 
quently it occurs the more permanent becomes its evil influence 
upon society. 

Still another source of idleness is the use of improved ma- 
chinery. Indeed changes in machinery are only improvements 
in proportion as they are labor-saving — i.e., labor-discharging. 
Hence machinery that will discharge the most laborers is always 
adopted. This takes place most frequently when trade is most 
prosperous, and in countries where machine-using methods are 
most general. Nor is it possible, or even desirable, that this 
should be otherwise, since it is only through the use of improved 
methods of production that the drudgery of human labor can be 
reduced, the luxuries of life increased, and social well-being en- 
hanced. Manifestly unless new employments are created as fast 



MISTAKEN POLICY OP EMPLOYERS, 389 

as laborers are discharged, enforced idleness and the recurrence 
of business depressions are inevitable. 

It thus appears that while the factory system necessarily creates 
socializing conditions, it has been accompanied by influences 
which tend greatly to neutralize their beneficial effect ; but it 
it is not difficult to see that these neutralizing influences are in 
no sense a necessary part of the industrial system. While the 
various forms of industrial specialization tend to increase the 
draft upon the laborers' energies, it is not at all necessary that 
this should be inimical to his social advancement. There is 
nothing in the nature of factory methods which makes it neces- 
sary that their use should be physically and socially deteriorating. 
Bad ventilation and other unsanitary conditions, dangerous 
machinery, overdriving, the employment of young children, and 
long hours of labor are not essential to the factory system, any 
more than slave labor and the cat-o'-nine tails were an essential 
part of cotton-growing. 

With increase of productive power and its accompanying 
pressure upon the laborers' resources should have come a com- 
mensurate increase in his leisure and opportunities for social 
improvement. The reason this has been neglected is entirely 
due to the mistaken social policy pursued by the employing 
class. For the same reason that the Southern slave-holder 
believed that slave labor was necessary to the cheap production 
of cotton and, consequently, to the prosperity of the planters, 
the modern employer has acted upon the erroneous assumption 
that cheap labor is necessary to his business prosperity. Accord- 
ingly he has resisted instead of promoting every effort to ameli- 
orate the condition of the laboring classes, from the same motive 
that the Southern planter opposed the abolition of slavery. All 
other efforts to increase the social opportunities of the laborer 
have been resisted by the employing class as mischievous agita- 
tions, until they were made imperative by statute law or social 
custom. Indeed their whole attitude toward the labor movement 
in general has been one of persistent hostility. The experience 
of the last fifty years, however, has shown that in almost every 
instance they were entirely mistaken. It is now admitted that 
free labor is more productive and economic than slave labor ever 
was. And instead of the prosperity of the manufacturing class 



390 ECONOMISTS A T FA UL T. 

having been lessened by the various restrictions imposed upop. 
their inhumane and uneconomic policy, it has steadily increased. 
The employer of to-day, with wages twice as high, hours of labor 
one fourth less, and the sanitary and social conditions of the 
laborer a hundred per cent, better, is more prosperous than were 
his predecessors fifty years ago. 

Nor is this socially repressive policy due to any peculiar per- 
versity of the employing class. They are not less humane and 
philanthropic than any other portion of the community, as their 
liberal contributions to charitable, educational, and other public 
institutions conclusively show. Their antagonistic attitude arises 
from a misconception of their economic relation to the laboring 
class ; and for this, the economic teaching of the period is 
responsible. The failure of the economist to recognize the revo- 
lution in the economic relation of the laborer to the capitalist 
which took place with the inauguration of the factory system, 
naturally led to the mistake of ignoring the economic importance 
of the laborers' consumption as the market basis for factory-made 
products. With this ante-factory-period view of the laborers' 
economic position, it naturally appeared to the employer that the 
true economic policy was to obtain his labor as cheaply as possi- 
ble. Oblivious of the fact that the success of his factory as a mere 
money-making institution depends upon the character and wealth- 
consuming capacity of the masses, he has systematically regarded 
the laborers as merely so much productive force to be used to the 
limit of their endurance. 

Under the influence of such doctrines, it is not surprising that 
the employing class should use every effort, industrial and politi- 
cal, to resist all endeavors to increase the social opportunities or 
raise the wages of the laborer.^ Thus, through the, influence of 
a mistaken industrial policy, the capitalist in the vain endeavor 
to increase his power to produce, by limiting the power of the 
laborer to consume, defeats the very object he most desires to 
accomplish, and instead of promoting his own permanent pros- 
perity, he is continually planting the seed of business depression, 
enforced idleness, and bankruptcy. Thus business depressions, 
instead of being a necessary part of the factory system, are really 
the penalty which the employing class and the community have 
^ See "Wealth and Progress," Part III., chapters vi. and vii. 



FACTS TO BE RECOGNIZED. 39 1 

to p^y foj; ignoring the economic and social advancement of the 
laboring classes as the real basis of industrial prosperity. 

Section III. — The Prevention of Business Depressions, 

It will be observed that business depressions are wholly a prob- 
lem of the market ; and also that the market, while fur^iishing 
the economic basis for production, is a social phenomenon, having 
its rise in the social life of the people. Whether scientific pro- 
duction shall continually cheapen wealth and increase social 
well-being, or whether it shall create enforced idleness and bu^- 
ness depressions, depends upon whether new employments are 
created as fast as labor-saving appliances are adopted. Produc- 
tion being the response to consumption, new employments can be 
created only as fast as new demands for commodities arise 
among the masses. This involves an important change in the 
general point of view from which the economic positioTi of the 
laborer is regarded. In the first place it must be distinctly recog- 
nized as an irrevocable historic fact, that with the inaugtiration of 
the factory system the econo7nic relation of the laborer to the capital- 
ist was radically changed^ and that under 7nodern industrial conditions 
the market for the capitalists' production finally depends upon the 
extent of the laborers' consumption ; hence business prosperity can be 
continuous ojily in proportion as real wages rise. And it must be 
no less distinctly recognized as a fundamental principle in eco- 
nomics that the cost of production is the controlling element in price 
movement^ and consequently that the determining element in the price 
of labor (wages) is the cost of the laborers' living as determined by 
the standard of his social life. 

It should be remembered, however, that capitalists are not 
philosophers, nor have we any right to expect them to be. They 
are captains of industry, and as such are too busy with the ad- 
ministration of affairs to solve economic problems. Their func- 
tion is to apply rather than to develop economic principles. The 
same is substantially true of the journalist. Although his posi- 
tion is that of an educator of public opinion, he is more like a 
manufacturer than a scientist. He is occupied rather with the 
popular presentation of accepted economic doctrines than with 
testing their validity. Like the capitalists, the ablest editors and 



392 ' NATURAL REMEDY. 

essayists rely mainly upon economists for their economic princi- 
ples. It is to the economists, therefore, that we have a right to 
look for the recognition and active propagation of the economic 
truths underlying this important problem. 

When the foregoing propositions are emphatically taught in 
colleges and acted upon by capitalists, the first great step 
towards a solution, not only of industrial depressions but of the 
social problem will have been taken ; and the chief cause of an- 
tagonism between the laboring and the employing class will have 
been removed. So long as the laborer and capitalist believe their 
interests are economically antagonistic, unity of action to redress 
social evils is almost impossible. If, however, the employing class 
can be once made to realize (i) that there is no economic antag- 
onism between the laborers' interests and their own, and (2) that 
the initial point of industrial prosperity is not in production but 
in consumption — not in the factory but in the home — not in profits 
but in wages, — there will for the first time be a common agreement 
as to the point towards which all efforts for industrial improve- 
ments must be directed, namely, the elevation of the laborer's stand- 
ard of living. This fact established, the only question would be 
as to the best means of promoting that end, since whatever would 
do that would promote the welfare of the whole community. 

It is not to be inferred from the above that an increase in the 
laborers' consumption (real wages) is a simple matter that can be 
arbitrarily accomplished by an official proclamation or a legisla- 
tive enactment. On the contrary, the laborer's standard of liv- 
ing, being determined by his social habits, is a matter of relatively 
slow development. 

Although there is no immediate panacea for business depres- 
sions any more than for poverty, despotism, or other evils arising 
from the lack of social character among the masses, there are three 
ways in which their severity may be diminished and their ulti- 
mate elimination promoted : (i) negatively by lessening the ob- 
structions to the social progress of the masses ; (2) positively by 
constantly increasing the social opportunities of the masses ; (3) 
by establishing an international business barometer by which ap- 
proaching business depressions will be indicated sufficiently in 
advance to enable their severest phases to be avoided. 

I. The greatest obstruction to the social progress of the masses, 
26 



DUTY OF EMPLOYING CLASS. 393 

as already pointed out, is the opposition of the employing class 
and their literary and legislative allies. With the acceptance of 
the doctrine here indicated, there would naturally be a marked 
change in the attitude of the press and statesmen toward the social 
question, by which much of their opposition would be removed. 
In the first place, such men as Edward Atkinson, David A. Wells, 
and the leading commercial and political journals would no longer 
appear as the opponents of every proposition, legislative or other, 
for improving the laborers' social condition. Indeed much of 
their present attitude toward the social question would then be 
properly regarded as opposition to the public weal. The accept- 
ance of this view would also further the same end by preventing 
a vast amount of misdirected effort at social reform, the futility 
of which often serves to strengthen the hands of the opposition. 
If it were clearly understood that nothing can promote business 
prosperity which does not directly or indirectly tend to elevate 
the laborers' social life, and make a larger consumption of wealth 
necessary, then the various social chimeras — such as land nation- 
alization, socialism, and the like — would be discredited in advance 
as having no real bearing upon the question. 

2. The disparity between the increase in the laborers' consump- 
tion as compared with that of the capitalists' production would 
be still more diminished, if the energy which has been constantly 
devoted to limiting the laborers' social opportunities were ap- 
plied to increasing them. Then every proposition for improving 
the condition of the masses would be approached with the desire 
of adopting whatever feasible element of good it contained, instead 
of a determination to magnify all its disadvantages for the 
purpose of defeating it. 

In order that the policy of increasing instead of restricting the 
laborers' consumption may be scientifically applied to the pre- 
vention of business depressions, it is necessary to have some 
means of knowing in advance the first indications of a business 
depression. It will be readily seen that if it could be correctly 
known that a movement towards business depression had set in, 
which if not arrested would inevitably bring a period of social 
disaster, all the wisdom of economists, statesmen, and capitalists 
would be applied to preventing its occurrence, and this could be 
done in two ways. 



394 ^^ INDUSTRIAL BAROMETER. 

In the first place, if correct economic doctrine prevailed, efforts 
would at once be redoubled in all manufacturing countries to use 
every known legislative, personal, social, and industrial means of 
augmenting consumption among the masses. This would involve 
efforts to raise the laborer's standard of living, which of course 
means an improvement in his social condition. If such efforts 
were made in all machine-using countries as soon as the symp- 
toms of an approaching depression appeared, it could always be 
weakened and in many cases obviated. 

In the second place, if the consumption of the masses in the 
various countries could not be increased sufficiently to offset 
a threatened diminution in the market, the depression could be 
largely mitigated by a movement of capital. As soon as it was 
definitely known that the relative diminution of the market had 
set in, while established industries could not, without injury, cur- 
tail their production, the investment of new capital could and 
would be curtailed. By curtailing investments sufficiently in 
advance much new capital would be saved, and the shock to 
established industries would be greatly reduced. 

Moreover, as business depressions generally arise from a dis- 
parity between consumption and production in certain lines of 
commodities, a proper knowledge of business phenomena would 
indicate in precisely what line of industry the disturbance existed, 
and thus enable a more economic direction to be given to new 
investments. By this means much of the capital that in such 
periods is wasted in America, England, France, and Germany 
might, and often would, be made to render a service to civiliza- 
tion by developing the social resources of South America, India, 
China, and other non-manufacturing countries. Is it possible 
then to establish such an industrial barometer ; is there any 
means by which the early symptoms of a business depression 
can be surely indicated ? I think there is. 

Although the first symptom of a business depression is the 
failure of the producer to find a profitable market for his whole 
product, this may occur from causes which do not necessarily 
indicate a depression in business. A change of fashion for 
example, or the substitution of a superior for an inferior product 
through the use of better methods, may produce that effect in a 
specific industry. In that case however, the dulness in the old 



STATISTICS OF IDLENESS. 395 

industry would be practically offset by the briskness in the new. 
Such a disturbance therefore will only be a temporary perturba- 
tion incident to the movement of capital and labor from one 
industry to another, and might indeed be a sign of business pros- 
perity rather than adversity. But there is one fact in the indus- 
trial world which infallibly indicates an approaching business 
depression, namely, enforced idleiiess. There are many ways in 
which enforced idleness may be produced in machine-using 
countries, e.g.^ by the immigration of laborers from non-machine- 
using countries, by discharges through the use of labor-saving 
machinery, or by the suspension of industry consequent upon a 
declining market. But from whatever cause or number of causes 
enforced idleness arises, unless it is arrested, an industrial 
depression is inevitable. 

It is equally certain that nothing can produce a business de- 
pression of serious proportions which does not create enforced 
idleness ; indeed, so long as the laborers are all employed a busi- 
ness depression is practically impossible. Therefore, while 
enforced idleness may not be the initial cause of business 
depressions, it is one of the earliest and most infallible indica- 
tions of it. Since a knowledge of the phenomena is a necessary 
prerequisite to scientific action, the first practical step toward 
prevention of business depressions, is the collection of statistics 
of enforced idleness. Nor would this be a difficult task, since 
the machinery for collecting industrial data is now fairly well 
established in most civilized countries. Statistics of enforced 
idleness not being of an inquisitorial nature, there could be 
no valid objection to their collection, especially as no class in 
the community would have any motive for withholding the 
information. In order that these statistics may have the utmost 
utility, the investigation should be authoritative, universal, and 
frequent. 

To make the investigation authoritative, it should be under- 
taken by the state. Moreover, it is a work which peculiarly be- 
longs to the government, because it is of universal importance, 
and can be performed more extensively, efficiently, and eco- 
nomically by the state than by the individual, especially in the 
less civilized countries. To give reliability to the data, the in- 
vestigation should be as extensive as the factory system, includ- 



396 NECESSITY OF FREQUENT DATA. 

ing at least America, England, France, Germany, Belgium, 
Switzerland, Austria, Italy, and Spain. 

These statistics should also be collected as frequently as pos- 
sible, not less than once a year, and half-yearly or quarterly 
would be even better. Frequency of collection is one of the most 
essential requisites of idleness statistics, because it is only by 
a frequent collection of facts that the symptoms of an on-coming 
industrial depression can be observed in its early stages and 
hence the most efficient means of prevention adopted. 

Such a body of data would furnish an inductive basis for the 
scientific application of economic principles to market phe- 
nomena, besides being invaluable in the treatment of all other 
phases of the social question. While it is not pretended that 
business depressions can be summarily abolished, it is indisputable 
that with full, frequent, and reliable statistics of enforced idleness 
in all machine-using countries, together with sound views regard- 
ing the economic relation of the laborers' consumption to the 
market, a great step would be taken towards their diminution and 
ultimate elimination. 



CHAPTER VI. 
COMBINATION OF CAPITAL. 

It is a peculiar feature of the industrial history of society that 
every movement towards concentration or more complex associa- 
tion of industrial forces has always been viewed with alarm, and 
has had to encounter serious opposition from the community. 
The landed aristocracy saw with dismay the rise and growth of 
the mercantile class from the fifteenth to the eighteenth century, 
and accordingly used all their social and political power to harass 
and hinder the development of what to them contained naught but 
evil for society. 

With the introduction of the spinning-jenny in the eighteenth 
century, this social alarm was taken up by the hand spinners. 
Their horror and indignation at the idea of a machine spinning 
eight threads where they could only spin one were such that they 
ransacked the home of Hargreaves, broke his machines, and drove 
him from his native county for inventing it. A similar alarm was 
raised in the first quarter of the present century by the hand- 
loom weavers against the introduction of the power-loom, and 
they went from town to town destroying the steam-driven ma- 
chines. The small factory owners, who had encountered the 
violence of the hand laborers, subsequently raised a similar 
alarm against the corporation, and now small corporations, 
individual factory-owners, laborers, and non-commercial classes 
all join in raising a similar alarm-cry against trusts, syndicates, 
and other corporate combinations. 

Perhaps the most remarkable feature in the attitude of the 
public towards industrial combination is their disregard for the 
lessons of history. The fact that in almost every instance the 
opposition to new forms of industrial organization has been a 

397 



398 IMPORTANCE OF CORRECT VIEWS. 

mistaken resistance to what finally proved to be a permanent 
benefit, seems to have almost no modifying influence upon their 
belligerent attitude. The opposition to trusts to-day is scarcely 
less intense than was that against the machines of Hargreaves 
and Arkwright a century ago.^ 

A very little reflection will show that this opposition to capi- 
talistic concentration is as uneconomic and impolitic as is the 
crusade of capitalists against the combination of labor, and for 
substantially the same reason. The fallacy underlying both these 
positions is the assumption that an improvement in the con- 
dition of either is obtained at the expense of the other. The 
capitalist is opposed to labor-unions because he believes that a 
rise of wages involves a fall of profits ; and the public oppose 
the combination of capital because they believe that the large 
profits of a successful corporation are necessarily obtained at the 
expense of the laborer and the consumer. 

In the light of the economic lavv of prices, surplus, and wages, 
as heretofore presented, the fallacy of such an attitude becomes 
apparent. When we once realize that profit is not added to the 
consumers' price, but that it represents a surplus produced by 
the use of superior instruments and natural forces, it is clear that 
the wealth of the capitalist is not drawn from the incomes of the 
other classes in the community, but from nature.^ And so with 
the capitalist ; when he understands that a rise in wages is not a 
permanent tax upon him, but is ultimately replenished through an 
increased product — hence, like his own profit, is not drawn from 
his fellow-man, but from nature, — the ground of his opposition 
to labor combinations will disappear. Since neither the employ- 
ing nor laboring class can permanently improve its condition by 
impairing that of the other, but only by increasing the product 
of nature, it will be obvious that neither one has any thing to gain 
by suppressing the combination of the other ; but, on the con- 
trary, if combination will increase their economic power, every- 
body has an interest in extending and strengthening such 
combination. 

^ In 1888 a bill was introduced into Congress proposing to levy a tax of 40 
per cent, on the products of trusts. In i88g two other bills were introduced 
into the United States Senate, practically making trusts criminal conspiracies. 

^ Chapter on " Prices." 



TWO KINDS OF WEALTH. 399 

Without stopping to consider whether or not the trust form of 
combination is superior to any other, it may be laid down as a 
fundamental principle demonstrated by the history of industrial 
evolution, that the combination of capital is indispensable to 
economic progress. This consists in cheapening wealth as com- 
pared with labor. Capital and labor being the only two factors 
which enter into the cost of production, it follows that wealth 
can be cheapened only by increasing the productive capacity of 
capital. It is a fact too obvious and universal to need discussing, 
that an increase in the productive efficiency of capital is obtained 
by means of greater specialization and concentration, which in- 
creases as civilization advances. Of this, every successful factory, 
railroad, and steamship enterprise is a demonstration. 

This much will be conceded by the most ill-informed anti- 
combinationist. But the objection commonly urged is that the 
gain resulting from this economy in production mainly accrues 
to a small class. It is insisted that this tends to create a double 
evil, by at once promoting industrial monopoly and political des- 
potism. They assure us that wherever wealth is accumulated in 
the hands of a few, the poverty of the people, political corruption, 
and private immorality increase, and that intellectual, political, 
and national decay inevitably set in.^ Although few arguments 
have more effect upon the public mind than this, there are none 
that reveal a greater lack of economic insight. It proceeds upon 
the assumption (i) that all accumulation of wealth in the hands 
of a limited class is injurious to the welfare of the community, 
and (2) that the concentration of capital necessarily destroys 
competition. 

I. If we bear in mind the economic distinction between con- 
sumable and productive wealth or capital already referred to, we 
shall have little difficulty in seeing the error of this proposition. 
Whether or not the accumulation of wealth in a few hands will 
be beneficial or injurious to society, will entirely depend upon 
whether it is consumable wealth or capital that is accumulated. 

No one acquainted with the subject will for a moment contend 
that concentration of consumable wealth in the hands of a small 
class is advantageous to the community. Since this class of 

^ See author's article on "Trusts," Political Science Quarterly, vol. iii., pp. 
403-406. 



400 CAPITAL ONLY IS ACCUMULATED. 

wealth only ministers to human welfare when in the possession 
of the consumer, it follows that it can only yield the largest 
benefit to the community when it is most extensively distributed 
among the people. With productive wealth or capital, however, 
the case is exactly the reverse ; its functions being solely that of 
a productive instrument, it can minister to human welfare only 
by producing consumable wealth. Clearly therefore, whether or 
not capital is any advantage to its owner or to the public, depends 
entirely upon whether it is advantageously used in creating en- 
joyable commodities. Since capital will only furnish consumable 
wealth to its owner in proportion as he can sell his products, its 
possession can only be advantageous to the capitalist when the 
consumable wealth it produces is generally and liberally consumed 
by the community. 

It may be observed in passing that there is no tendency in 
modern society to accumulate consumable wealth. On the con- 
trary, the very prosperity of the community depends upon the 
constantly increasing consumption of consumable wealth. When 
we speak of the accumulation of millions in the hands of a single 
individual or family to-day, it should be remembered that cap- 
ital and not consumable wealth is referred to. With the excep- 
tion of a small amount personally consumed and dispersed in 
charities, the large fortunes of the Vanderbilts, Goulds, Astors, 
Rothschilds, and other millionaires are productively employed. 
Indeed, it would be regarded as the insanity of financiering to 
accumulate consumable wealth, because the only result of such 
accumulation would be deterioration and loss. As shown in the 
preceding chapter, any tendency to prevent consumption from 
keeping pace with production, which is simply accumulating con- 
sumable wealth, surely leads to business depressions, and entails 
inevitably bankruptcy, and often ruin upon the owners of capital. 
Since capital can be of no advantage to its owner except when it 
is profitably employed in producing consumable wealth, and since 
it can be so profitably employed when its product is consumed 
substantially as fast as it is produced, it follows, as an economic 
necessity, that consumable wealth is most widely distributed 
where productive wealth or capital is most concentrated. Thus 
we again arrive at the oft-repeated proposition that the prosperity 
of the capitalist finally depends upon the consumption of wealth 
by the masses. 



CONCENTRATION AND COMPETITION. 40I 

2. The second objection is that combination of capital tends 
to destroy competition. If this assumption be correct, the power 
of competition will necessarily diminish as the combination of 
capital increases. Whether or not this has taken place can be 
determined only by the facts. In order to determine whether or 
not effective competition increases or diminishes with combina- 
tion of capital, we have only to ascertain whether or not prices 
tend to press closer to the line of the cost of producing the most 
expensive portion of the general supply. Tried by this test, the 
assertion that the combination of capital necessarily tends to 
destroy competition will be found to be entirely erroneous. 

There never was a time when economic combination was so 
great as it is to day, nor was there ever a time when competition 
was so fierce and unsparing — that is to say, when the margin 
between the cost of producing the dearest portion and the selling 
price was so small in such a large proportion of industries. In- 
deed, it is one of the chief indictments against the capitalistic 
system of production that it is a "competitive system." If we 
follow the combination of capital from the hand-loom weaver 
and the spinner of a single thread to the trust and syndicate, we 
shall find that the margin of profit per unit of product has steadily 
diminished — a fact which every business man knows. The 
reason for this is obvious. For instance, when the hand-loom 
weaver could only turn off forty yards of cotton cloth a week, a 
margin of a cent a yard would yield but an insignificant amount 
of profit. The profit on the product of fifty weavers would only 
be $25 a week, whereas the same margin on the product of fifty 
weavers to-day would yield a profit of $1,080 a week. 

Much of the error in this connection is due to judging compe- 
tition from the standpoint of the deposed or receding competitor. 
Thus, when the products of a small factory undersold those of a 
hand-loom, judged from the standpoint of the hand-loom weaver, 
competition was destroyed and monopoly established. Such 
however was not the case, as everybody now knows. What 
really took place was a readjustment of economic factors, made 
necessary by the introduction of superior methods, which resulted 
in transferring competition to a new plane, where its effectiveness 
was greatly increased. The same was true when the small factory 
was superseded by the corporation, and is true now whenr the 
corporation is superseded by the trust and syndicate. 



402 THE CRITERION OF COMPETITION. 

It should be remembered that the iij^uence of competition 
dees not depend so much upon the number of competitors as 
upon the effectiveness of competition. Competitors may be very 
numerous and still competition be ineffective, as in the case of 
the hand-loom weavers. And conversely, competitors may be 
few in number and still be very effective, as is the case of large 
concerns to-day. One Macy furnishes more effective competi- 
tion than a hundred small merchants with a few hundred dollars 
capital each. This does not mean that reducing the number of 
competitors will necessarily increase effective competition, but it 
demonstrates the fact that high competition is possible with a 
small number of competitors. Indeed, it is the severity of com- 
petition thus developed that has brought the trust and other 
forms of industrial confederation into existence. 

That effective competition has thus increased with the increas- 
ing combination of capital, no one acquainted with the subject 
will dispute, but the alarm raised is ostensibly for the future. It 
is upon what trusts may do, and not upon what they have done, 
that the present opposition is based. It is said that the object of 
the trust is to monopolize the market. Even so ; there is nothing 
new in that. That has been one of the objects of every other in- 
dustrial improvement. What motive could there be for intro- 
ducing better methods and investing large capital, unless it would 
give the owner more advantage over existing competitors. To 
condemn an industrial institution because the object of its pro- 
moters is to undersell and supersede traditional producers and 
methods is economic insanity. It is not the motive of the capi- 
talist but the economic effect of his action that must be deter- 
mined in judging the social utility of industrial methods and 
institutions. Whether the capitalist acts as an individual pro- 
ducer, small factory owner, corporation, or trust ; whether he 
produces cotton cloth, shoes, or petroleum, conducts a railroad or 
publishes a newspaper, his motive is substantially the same ; 
namely, to obtain more wealth — " to make money." Will it pay 2 
is the question upon which the doing or not doing in every 
sphere of industrial activity is determined. 

The tone and politics of the newspapers are determined by 
that fact about as completely as is the form and quality of hats 
and shoes. Newspaper corporations have not invested hundreds 



ECONOMIC INCENTIVE. 403 

of thousands and even millions of dollars in buildings, large and 
fast presses, automatic folders, foreign correspondence, special 
telegrams, high salaried editors and reporters, special trains for 
deliveries, etc., merely for the sake of furnishing the public with 
ample, early, and reliable news. This has all been developed by 
the effort of each to outdo his neighbor in the contest for obtain- 
ing public patronage — the market. It was only because this 
could not be done without furnishing a larger or a better paper 
at the same price — which nothing but a greater combination of 
capital and superior methods made possible — that the immense 
improvements in the daily paper have been produced. The same 
motive which has induced newspaper corporations to furnish 
a daily history of the human race for two cents, has given us our 
railroads, telegraphs, steamships, and other time-and-space- 
reducing and wealth-cheapening institutions, of which trusts are 
the most recent form. And the reasons for suppressing one will 
apply with equal force to suppressing the others. 

The opposition to the larger combinations of to-day will be 
found to have its root in the error which has characterized all 
previous opposition to productive integrations. The averagely 
intelligent antagonist to trusts will readily admit that all the evil 
predictions regarding the earlier stages of capitalistic combina- 
tion v/ere mistaken. He will also admit that the mistake consisted 
in the failure to recognize the increasing competitive power 
which the larger factory and corporation possessed, especially 
when accompanied by the daily press, the telegraph, and the rail- 
roads. The more intelligent now see that a multiplicity of com- 
petitors is not necessary to effective competition, having learned 
by experience that this may result in a great waste of economic 
power instead of a cheapening of commodities, and that compe- 
tition is quite as effective, and far more economic, with a limited 
number of competitors. While they recognize the folly of 
assuming that any diminution in the number of competitors must 
weaken competition, they tenaciously insist that to permit the com- 
bination of capital to increase until the actual competitors are re- 
duced to zero, must destroy competition. In other words, they 
insist that competition is impossible unless the competitors are 
actually present in the market. 

The error in this view arises from overlooking the influence of 



404 ~ POTENTIAL COMPETITION, 

potential competition. If we examine the subject from the 
standpoint of modern phenomena, we shall find that there is 
potential competition as well as actual, and that the economic 
effect of potential competition increases as its phenomena grow in 
complexity. The competitive power of capital will be found to 
ultimately depend not merely upon its actual presence, but upon 
its known availability at any given time and place. Consequently, 
the more intelligent and economically powerful competitors are, 
the more effectual will be their potential or possible competition, 
and vice versa. For example in the ante-factory period, with 
neither railroads nor telegraphs, the only capital known to be 
available was that visibly present ; hence, none other exercised 
any competitive influence in the market. 

With the development of modern industry all this has changed. 
Electricity and steam have so diminished time and space, and 
concentration of capital has so increased the economic power of 
the producer, that now both capital and products thousands of 
miles away are economically available, and therefore exercise a 
positive competitive influence upon the market. Accordingly the 
wheat in India, Russia and Dakota, now exercises practically the 
same competitive influence in Liverpool as does that which is 
stored there, and solely because it is known to be actually avail- 
able for the Liverpool market if the price rises high enough. to 
warrant its movement thither. Thus through improved means of 
communication and transportation, products in the most remote 
parts of the earth exercise a competitive influence upon a market 
they may never actually enter, simply because it is known that they 
can be there if needed. 

What is true of commodities is even more true of fixed capital, 
and as will readily be seen, potential competition or the power of 
the possible competitor increases as the combination of capital 
enlarges. Capital is proverbially one of the most sensitive things 
in the world. Although it will take great risks for large profits it 
will timidly recede at the sight of loss. There are many reasons 
why large combinations are more amenable to the influence of 
potential competition than small ones. Although more powerful, 
they yet have more at stake. The very fact that capital is cow- 
ardly makes it careful, and, since fear of loss next to hope of gain 
is the most powerful motive which governs its movement, the first 



INABILITY OF LARGE CAPITAL, 405 

condition to be secured is safety against loss. The greater the 
concentration of capital, the more serious and difficult this be- 
comes. 

It is a principle in economic progress that as the mobility of 
consumable wealth increases that of productive wealth diminishes, 
because the very means which promote the easy transfer of prod- 
ucts involve a greater fixity of capital. In proportion as capi- 
tal loses its mobility, the necessity of maximizing its economic 
utility in its existing form increases ; and when the concentration 
is very great, that becomes the only means of preserving it from 
deterioration. Take, for example, the Vanderbilt railroad system 
with its investment of $170,000,000 and 60,000 employes; this 
is excellent property so long as it can be economically employed 
for its present purpose. If, however, it should be superseded by 
a superior system of transportation, the greater part of that prop- 
erty would be worthless, the capital invested being absolutely 
non-transferable. Such parts of the equipment as the rails, road- 
bed, engines, cars, and stations (representing nearly $150,000,000) 
which now have a full value as finished products, would in that 
case practically be reduced to the value of old iron. Three 
fourths of their value would vanish as completely as if the prop- 
erty were reduced to ashes. 

If we bear in mind the fact that capital is simply an economic 
instrument whose decay can only be prevented by maintaining its 
productive utility, it will be manifest that in proportion as its con- 
centration increases, the very life of capital depends more and 
more upon its wealth-cheapening efficiency. It will probably be 
replied that this may all be true so long as any actual competi- 
tors remain, but when the combination of capital has reached a 
point where the production of a given commodity is practically 
in the hands of a single concern this restraint will disappear, and 
prices can be indefinitely increased to suit a monopoly. Here is 
where the error of ignoring the influence of potential competition 
again shows itself. The very fact that capital cannot take wings 
and fly away, but is compelled to work where it is or perish, gives 
potential competition its greatest influence ; that is to say, gives 
the non-employed or less remuneratively employed capital its 
maximum price-reducing influence. It should never be forgot- 
ten that in a progressive society, where alone the greatest combi- 



4o6 EFFECT OF NO-PROFIT CAPITAL, 

nation of capital is possible, two things are more or less con- 
stantly occurring: (i) the accumulation of wealth available for 
productive purposes, which increases as the margin of profit 
rises ; (2) the reduction of capital to no-profit uses, which in- 
creases as superior productive methods and management are 
adopted. From these two causes, which are as universal and 
constant as social progress, capital seeking remunerative employ- 
ment is constantly increasing. 

Hence this idle or unremunerative capital has the same eco- 
nomic effect upon productive capital that the wheat in India or 
Russia has upon that in Liverpool ; it is waiting for an opportu- 
nity. In the absence of legal restrictions, nothing will prevent 
this anxiously waiting capital from actj^ually entering the field 
except keeping the margin of profit too small to warrant the risk. 
This of course involves the lowering of prices commensurately 
with the diminished cost of production, which is all the fiercest 
actual competition can do. It may be said that if new capital 
enters the field a monopoly will buy it up. But that takes more 
capital ; a million dollars invested in buying up a competitor is 
so much added to the cost of production, and directly dimin- 
ishes profit. Clearly the million thus invested might just as well 
be surrendered to the community in lower prices. That this 
would be a safer and more economic method is manifest : (i) 
because lowering the price tends to increase the consumption of 
the commodity, extend the market, and make a still smaller 
margin of profit yield a greater aggregate return ; (2) because a 
new competitor is an unknown quantity, and may prove too strong 
to be bought up, in which case existing producers may be driven 
from the field, or have their profits reduced to zero. Since the 
least danger to existing corporations lies va. keeping out rather than 
buying out ntw competitors, and since reducing prices alone can 
do this, it follows that the larger a corporation the greater is its 
interest in keeping prices low enough not to induce the organiza- 
tion of counter-enterprises to jeopardize its existence. It is thus 
evident that with economic freedom, the potential competition of 
available capital is essentially the same as if a new competitor 
were actually on hand. The fact that he may come any day has 
practically the same competitive influence as if he had cojne, 
because to keep him out requires the same kind of price-reducing 



LIMIT OF CONCENTRATION. 407 

effort that would be necessary to drive him out. Since the former 
always involves less risk and generally less cost than the latter, it 
is most likely to be adopted, in proportion as an intelligent under- 
standing of economic movement prevails. 

It is a great mistake to suppose that the investment of large 
capitals is specially desirable to the capitalist. On the contrary 
he avoids this as much as possible, always preferring to get along 
with the minimum rather than to use the maximum capital to 
accomplish any given result. Indeed to accomplish the greatest 
result with the least investment is the very art of economic pro- 
duction. Moreover, with every increase in the size of invest- 
ments capital becomes more fixed, involved, and unwieldy, redu- 
cing margins and making it possible for great losses to result 
from very slight mistakes ; consequently greater expertness of 
management becomes necessary in every department of a colos- 
sal enterprise. Larger investments increase the risk of the capi- 
talist and further outlay will be adopted only under the spur of 
some economic inducement — such as avoiding a loss, replenish- 
ing a diminished profit, or perhaps obtaining a still larger profit. 

The economic movement of capital being governed by the law 
of increasing returns, it follows that capital will not (except by 
mistake) go into new industries unless it can obtain a greater 
return per unit than it is already receiving. So, too, of concen- 
tration or combination ; capital will continue to concentrate ofely 
so long as it can obtain an increasing return per unit by so doing. 
When that ceases to be possible the motive for combination dis- 
appears ; and when the point of diminishing returns is reached 
self-interest is positively against further combination. That there 
is a point in any given state of society at which further concentra- 
tion of capital will fail to yield increasing returns, and at which 
diminishing returns set in, cannot be doubted. Whether or not 
this point will be reached before the actual competing producers 
in the same market disappear cannot now be determined. Nor is 
this of any real importance since concentration will continue only 
so long as it will give increasing returns to the capitalist and 
cheaper products to the consumer. There is therefore no eco- 
nomic reason why the state should do any thing to limit the con- 
centration of capital, since that will be arrested by the capitalist 
when it ceases to economize production and cheapen the wealth 



4o8 



EFFECT OF CONCENTRATED CAPITAL, 



of the community. In other words, in the absence of legal re- 
strictions economic law is more effectual in determining the equi- 
table movement of capital than statute law can possibly be. 

That this has been the general effect of the concentration of 
capital during the present century is abundantly proven by the 
fall of prices and rise of wages as shown by the increased pur- 
chasing power of a day's labor during that period. The follow- 
ing table shows the average weekly wages and their relative 
purchasing power in 200 staple articles for i860 and 1885 : ^ 



Industries. 



Arms and ammunition. 

Artisans' tools 

Boots and shoes 

Carriages and wagons . , 

Clothing 

Cotton goods , 

Flax, hemp, and jute. , 

Leather , 

Liquors , 

Machinery , 

Metallic goods 

Musical instruments. . , 

Paper goods , 

Print and dye-goods . . . 
Silk and silk goods. . . . 

Stone 

Woollen goods 

Worsted goods 

Carpetings 

Building trades 






Average 



.(Total 386) 



i860. 



^^ 



$14.15 

8.45 

11.42 

10.47 

8.26 

6.50 

4-63 

10.01 

10.73 

7.90 

9.07 

10.94 

8.63 

9.90 

5.91 
8.01 

5.38 

6.12 

6.62 
9.87 



5.64 



Pi 



100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 



^^ 



P13.15 

11-45 

10.63 

12.80 

8.19 

6.45 

6.46 

II. 01 

11.73 

11-75 

11.25 

12.94 

7.63 

7.67 

6.91 

12.01 

7.90 

6.12 

6.62 

14.99 



9.88 






119 

174 
120 

157 
127 
128 
180 
141 
141 
192 
161 
152 
114 
100 
167 

193 
189 
129 
129 
196 



150 






19 
74 
20 

57 
27 
28 
80 
41 
41 
92 
61 
52 
14 

67 
93 
89 

29 
29 
96 



50 



This tendency is still more conclusively shown by the fact that 
the fall in prices has been greatest in those commodities in 
whose production there has been the greatest concentration of 



^ The wages in the above table represent 386 occupations in Massachusetts ; 
the data -for i860 will be found in the Report of the Labor Bureau for 1884, and 
those for 1885 in the Census Report for 1885 (volume on Manufactures). 



EFFECT OF TRUSTS ON PRICES. 



409 



capital, as will be seen by the accompanying table, which shows 
the purchasing power of weekly wages in commodities furnished 
by trusts and other colossal combinations for i860 and 1890 : 



Purchasing power of weekly 
wages. 


i860. 


i8go. 


Percentage 
of increase. 


Cotton-seed oil, number of gals. . . 

Sugar refined, number of lbs 

Freight New York to Chicago. 


iSx!^^ 
90xtir 

530 lbs. 

654 

822 

1309 

8xV^^" 
io7xVt) " 


29xVTr 
152 

1317 lbs. 

1520 

1976 

2822 " 

311^ " 
10863^9^ " 


66 
67 

148 
132 
176 
115 

283 
907 






Fourth class 


Telegraph messages, number of. . 
Pretroleum refined, number of gals. 



It will be seen from the above tables that, although the general 
purchasing power of wages has greatly increased since i860, the 
increase has been very much greater in those industries where 
the greatest concentration of capital has taken place. Taking 
too staple articles together, the increase is 53to-V P^^ cent., 
whereas, in cotton-seed oil, it is 6() per cent. ; in sugar, 67 per 
cent. ; in transportation (all classes) together, it is 142 per cent. ; 
in telegraphy, 283 per cent. ; and in petroleum, 907 per cent. It 
should be observed in this connection that the figures for cotton- 
seed oil only extended to 1878, and that more than W of the 
entire fall in the price has taken place since the trust was formed 
in 1884 ^ ; and also that the fall in the price of sugar during the 
last thirty years has all taken place since January, 1882.* 

It may be said that the point has not yet been reached where 
actual competitors are reduced to none, and therefore the cor- 
rectness of the theory here presented cannot be inductively 
verified. It is true that there are very few industries in which the 
actual competitors are not still relatively numerous. Nor is there 
any sufficient ground for concluding that the time will ever come 

^ The figures in this table are for 1878. 

'•^ These figures are for 1866. 

^ In 1878 the price of standard summer oil was 47iVo cents a gallon ; in 1883 
it was 47xf^ cents a gallon ; it is now (September 27, 1890) 33 cents a gallon. 

^ The average price of re/ined sugar in i860 was g|^ cents a pound. In Janu- 
ary, 1882, it was 9f, and in July 9^% cents a pound. 



410 STANDARD OIL TRUST, 

when this will not be the case in a great majority of industries, 
but that in some industries production may practically be in the 
hands of a single concern is certainly within the range of possi- 
bility, since we have at least one instance of this kind already in 
the Standard Oil Trust. This concern comes nearer to having 
complete control of a given product than perhaps any other en- 
terprise in the world. When petroleum was refined by small con- 
cerns, it was very poor in quality and very high in price. In 
1861, when crude oil was only ly^o^o cents a gallon, refined oil 
was 6i-y¥o cents a gallon, making the cost of refining and trans- 
portation 6oYyo cents a gallon. By concentration of capital and 
the improved processes of ten years, the price of refined oil was 
reduced to 2\-ff-^ cents a gallon. The oil was still both poor and 
dangerous to use, casualties from exploding lamps being of daily 
occurrence. This was practically as far as small concerns were 
able to carry the light-improving and price-reducing processes, 
and although the quality was poor and the price high the re- 
finers' profits were small. 

In 1872 the refiners formed a combination called the Standard 
Oil Company, which however did not include any considerable 
portion of the refiners until 1874, but by this concentration of 
productive power they were able to introduce various improve- 
ments otherwise impracticable. For example, before the organi- 
zation of the Standard Oil Company, crude oil had to be trans- 
ported from the wells to the market in small quantities, in 
barrels, tanks, etc. After the organization of that company, 
various methods of reducing the cost of transporting oil were 
adopted, which, about 1879, resulted in substituting for the rail- 
road and other means of transportation, a general pipe line taking 
oil from the various wells and delivering it directly to the market. 
There are now two such lines reaching New York, with the capac- 
ity of 25,000 barrels a day. There is also one such line to the 
cities of Philadelphia, Baltimore, Buffalo, Cleveland, &nd Pitts- 
burgh, and one is being constructed to Chicago. This was an 
undertaking absolutely beyond the power of any of the smaller 
corporations. Nothing short of a colossal combination was ade- 
quate to the task, which resulted in a saving of over dd per 
cent, of the cost of transportation alone. 

Similar savings in other departments, such as the manufacture 
of their various supplies, have been accomplished by virtue of 



ITS ECONOMIC METHODS. 



411 



the consolidation. Thus in 1872 barrels cost $2.35 each ; to-day 
the trust manufactures them for its own use at $1.25 each, a re- 
duction of 47 per cent., or a saving of nearly $4,000,000 
a year. In the cost of manufacture of tin cans, a saving of 50 
per cent, has been made, the price having been reduced from 30 
to 15 cents per can since 1874. As this company uses about 
30,000,000 tin cans a year, that makes a saving of over $4,500,000 
annually. The same is true of wooden cases, which in 1874 cost 
20 cents each, while the company now manufactures them for 
itself at a cost of 13 cents each, being an annual saving of about 
$1,250,000. Similar economies have been established in the man- 
ufacture of tanks, stills, pumps, and other things used in the busi- 
ness. As a result of all this the price of the refined oil was 
reduced in eight years, 1872-1879, from 24YWcents to Syfo cents 
a gallon, or 66yVo P^r cent. Moreover, in addition to thus low- 
ering the price, the quality of the oil was greatly improved by 
entirely eliminating the explosive elements and increasing its 
illuminating quality. 

By these improvements in quality and reductions in price, the 
market for oil was greatly extended, and in 1880 a still further 
combination of capital was undertaken and the trust formed. 
This, as before remarked, included nearly all the leading refiners 
in this country, and therefore actual competition in this business 
was minimized.^ Under these monopolistic conditions, accord- 
ing to the usual predictions, the price of oil might have been ex- 
pected to rise, but the fact is that it continued to fall as will be 
seen by the following table : 



Year. 


Price of crude oil per gallon 


Price per gallon of refined oil 


at wells. 


for export. 


1880 


2.24 


9.12 


1881 


2.30 


8.05 


1882 


1.87 


7.41 


1883 


2.52 


8.14 


1884 


1.99 


8.28 


1885 


2. II 


7.86 


1886 


1.69 


7.07 


1887 


1.59 


6.75 


1888 


2.07 


7.50 


1889 


2.42 


7.25 



The Standard Oil Trust refines about 75 per cent, of all the oil in this country. 



412 EFFECT OF UTILIZING WASTE. 

It will be observed that this fall in the price of refined oil 
is none of it due to a fall in the price of the crude oil which re- 
mained practically unchanged. This is the more surprising be- 
cause improvements in the means of transportation and other 
processes had already been practically maximized, and, as will 
be readily observed, the possibilities for economy are very much 
less when the price has reached 9 cents than when it was 24 
cents a gallon. Manifestly if the community is to receive in 
reduced prices the advantage of the limited improvements that 
remain possible and profits are to be maintained, economies 
must take a new direction. And this is exactly what has taken 
place. 

During the last few years, and especially since the organization 
of the trust, a series of improvements has been developed by 
means of which what had been previously wasted is now con- 
verted into valuable commodities. In the refining of petroleum, 
after the illuminating oil is abstracted, there is a large residuum 
left which hitherto had only a fuel value. This formerly wasted 
material is now converted into naphtha, lubricating oils, paraffine 
wax, etc. In order to do this, however, expensive machinery and 
manufactories had to be constructed expressly for the purpose, 
which could only be profitably undertaken in connection with the 
most colossal processes of petroleum refining. Some idea of the 
extent of this may be formed from the fact that naphtha thus pro- 
duced supplies more than two thirds of the public light of New 
York City, Brooklyn, and Jersey City because it is cheaper than 
gas. The price of paraffine oil also has been reduced by this 
means from 22 cents to 11 J cents a gallon, and has been improved 
50 per cent, in its lubricating qualities. In 1875 the standard 
for American paraffine oil by the commercial test viscosity was 
100 seconds at a temperature of 70 ; it now tests 150, and its flash 
point, which in 1875 was 300, is 380. 

Moreover, in 1875, paraffine oil could not be used for lubrica- 
ting machinery without an admixture of from 20 to 50 per cent, 
of animal oil, while to-day it can be used without any animal oil. 
This is true of several other lubricants made from petroleum, 
especially cylinder oil. Even for railroad purposes this super- 
sedes tallow and other animal lubricants, having the great merit 
of preventing corrosion by keeping the metal surfaces bright and 



EFFECT ON OTHER COUNTRIES, 413 

clean. In 1875 the price of petroleum cylinder oil was $1.25 per 
gallon ; it is now only 35 to 40 cents. The price of black lubri- 
cating oils used for railroad axles was 15 to 18 cents a gallon in 
1875, and to-day it is sold at 7 and 9 cents. The monthly sales 
of mineral lubricating oils were not more than 10,000 barrels in 
1875; they are. now nearly 70,000. Furthermore, the animal 
product of paraffine wax from petroleum was less than 6,000 tons 
in 1S70, and this year the product is estimated at fully 20,000 
tons, and the price has been reduced from 9 to 5 cents a pound. 
It may be added that the quality of this product has been so im- 
proved, that for candle purposes, especially in Great Britian, it 
has superseded tallow, stearine, products of palm oil, etc., and 
the price of candles has been reduced one half in consequence. 

In addition to all this the trust has undertaken the manufacture 
of its own sulphuric acid, having need of a greater quantity of that 
product. Through improved processes introduced into the manu- 
facture of this commodity the price has been reduced from a cent 
and a quarter a pound to eight cents a hundred pounds. By such 
means this trust has been able to give to the community in 
reduced prices the full benefit of all improvements in refining 
petroleum, and to obtain its profit from what formerly was mere 
waste. 

Nor is this all ; the series of improvements, from the pipe line 
up, which have thus been developed through the increasing com- 
bination of capital, has since been copied bodily in Russia. 
Petroleum was discovered there long before it was known in 
Pennsylvania, but because of crude methods for developing it 
it was not much more serviceable to them than were the valuable 
mineral and agricultural possibilities of this country to the 
Indians. But after the development of these processes here, 
the combination of European capital took America's experience 
and discoveries to Russia, where oil is now produced by sub- 
stantially the same process. It will thus be seen that the com- 
bination of capital in this industry has nai only lowered the price 
and improved the quality of oil in this countr)^, but has actually 
transferred that much of our civilization to Russia. 

It may be said that this is not true of all trusts, but that some 
of these combinations have used their power to increase instead 
of to reduce prices. That there are men at the head of trusts 



414 TRUSTS AND CORNERS. 

who mistake their true economic function will not be questioned 
for a moment ; but to the extent that trusts are used for specu- 
lative instead of productive purposes — to create corners instead 
of reducing the cost of production — will they fail to be a perma- 
nent advantage either to the community or to those undertaking 
them. Corners can only be successful to the extent that they 
can control a commodity for a sufficient length of time to force 
its price up abnormally high. The concentration of productive 
capital in trusts, railroads, syndicates, and the like, tends to 
ultimately prevent this in two ways : (i) By increasing the 
amount of product to such proportions as to make its permanent 
control by a few persons practically impossible. (2) By in- 
creasing the facilities for communication and transportation so 
that commodities can be readily obtained from any part of the 
world. 

Before the period of steam and the combination of productive 
capital, although millionaires were few, corners were numerous 
and relatively successful. With the development of the railroad, 
telegraph, steamship, large factory, and trusts, however, corners 
have become more and more impossible. This is shown by the 
fact that during the last fifteen years almost every extensive 
attempt to corner commodities has resulted in serious loss and 
often ruin to its projectors. Witness Black Friday, and the ruin 
of Keene in the wheat corner five years later, and the failure of 
the copper syndicate last year, which came very near bankrupting 
a number of the largest capitalists in the world and breaking the 
bank of France. 

The reason for the failure of these and many other efforts to 
fictitiously inflate prices, is that the quantity of wealth produced 
and the means for rapidly transferring it to any given point have 
increased so enormously that to corner any staple product long 
enough to accomplish the end desired is practically impossible. 
Thus, so far from the combination of capital in production and 
transportation being the cause of, or favorable to, corners, it 
tends more and more to make merely speculative monopolies 
impossible. The recent experience of the sugar trust and the 
cotton-seed oil trust also illustrated the same tendency. The 
combination of capital is strictly an economic phenomenon 
subject to economic law, and when it is used for an uneconomic 



RESPONSIBILITY OF CAPITALISTS. 415 

purpose it is pretty certain to bring its own punishment. In 
other words, productive combination is in the order of industrial 
evolution, and any attempt to permanently restrict that move- 
ment is inimical to the best interests of a progressive society. 

There is one fact, however, that capitalists would do well not 
to overlook — namely, that their safety in the future depends upon 
the economic use of their power. If they persist in the effort to 
employ the power of combination for uneconomic purposes, they 
will find themselves confronted by another and more summary 
kind of opposition than economic law presents. In proportion 
as the social condition of the masses improves and they become 
more informed and politically powerful, do they become sensitive 
about their rights, conscious of their strength, and indignant at 
any effort to trifle with their interests. Consequently, if capitalists 
fail to recognize this important fact and continue to trifle with 
the interests of the community by perversion of their industrial 
power, they may suddenly find themselves in the hands of an 
arbitrary political authority whose action may be even more un- 
reasoning than theirs has been uneconomic. There is nothing 
which furnishes such a plausible basis for the demands of 
socialism to-day as the uneconomic conduct of the capitalist 
class. Whether industrial evolution and civilization shall be 
permitted to advance by increasing the wealth-cheapening capa- 
city of capital, or whether society shall be forced into an experi- 
ment of socialism with its stultifying influences, will mainly 
depend upon the use made by the capitalist class of the economic 
power which society has conferred upon them. 



' CHAPTER VII. 
THE COMBINATION OF LABOR. 

The combination of labor is the historic and economic accom- 
paniment of the combination of capital ; it is as necessary to the 
wages system as the factory is to capitalistic production. In the 
preceding chapter we saw how uneconomic and short-sighted is 
the policy of those who oppose the concentration of capital. The 
unwisdom of this opposition is quite clear to the particular capi- 
talists against whom it is directed. It was clear to small fac- 
tory owners in the first quarter of this century ; it was obvious to 
the corporations in the third quarter of this century, and it is no 
less manifest to trusts, syndicates, and other colossal combina- 
tions of to-day. But singularly enough they are all tacitly or 
avowedly opposed to the combination of labor. The president of 
a syndicate, trust, confederated railroad, or telegraph system, can 
see the folly and inconsistency of the large newspaper, itself a 
gigantic corporation, railing against the combination of capital ; 
but he is apparently oblivious of his own inconsistency in 
opposing the combination of labor. This attitude can be 
explained only on the grotind of mistaken notions regarding the 
subject. A little reflection will show that every reason which 
obtained for the concentration of capital applies with equal 
force and for similar reasons to the combination of labor ; and 
that all the objections urged against the combination of labor are 
applicable to the combination of capital. 

The standard by which all social institutions must be judged 
is their influence upon the welfare of the community ; nothing 
can permanently promote the industrial welfare of society which 
does not either reduce prices or increase wages. Since the eco- 
nomic effect of the combination of capital is shown in the price 

416 



I 



OBJECTIONS TO TRADES UNIONS. 417 

of commodities, and that of the combination of labor is shown in 
wages, the social utility of the former must be judged by its ten- 
dency to make wealth cheap — to reduce prices, — and that of the 
latter by its tendency to make men dear — to increase wages. We 
have already seen that, judged by this test, combination of capital 
is a great social benefit, and if we bear in mind the point of view 
from which the discussion has proceeded, we shall have no diffi- 
culty in seeing that the same is true of the combination of labor. 
Among the many objections to trades unions it is urged : (1) That 
they are un-American, because they were born inandbelong to the 
monarchical institutions of the old world, and are out of place in 
a democratic republic ; (2) that they tend to destroy the right of 
individual contract, and thereby limit the laborer's freedom and 
industrial independence ; (3) that they tend to encroach upon 
the employer's right to manage his own business by preventing 
him from contracting for bis labor with the laborers individually ; 
(4) that they cannot increase wages and improve the laborers' 
social condition, because they are contrary to natural law, . 

1. It is true that trades unions were not born in America ; neither 
were factories and railroads. If labor combinations are to be 
rejected in America because they arose in Europe, then the use 
of steam, the daily press, our literature, language, religion, and 
indeed our very civilization may also be rejected for the same 
reason. Of all the objections urged against the combination of 
labor, there are none more flippant and absurd than the fact that 
it was of old-world origin. Trades unions arose in England 
solely because capitalistic production and the factory system had 
their rise there. The combination of labor, like that of capital, is 
not a national but an economic institution, and must be judged 
entirely by its economic characteristics. To call an institution 
un-American because it did not have its birth in the United 
States, is to fail to distinguish between an economic principle and 
a geographical location. The truth or wisdom of a doctrine, in- 
stitution, or policy, does not depend upon how or where it arose, 
but upon the social effect of its application. 

2. The contention that trades unions destroy the right of indi- 
vidual contract and limit the laborer's freedom has a plausible 
seeming, but it is singularly superficial. If it be true that com- 
bination destroys the freedom of the laborer, why does it not 

27 



41 8 SOPHISTICAL OPPOSITION. 

also destroy that of the capitalist. It will hardly be contended 
that capitalists who have steadily integrated into larger and 
larger combinations are less free than formerly ; one great com- 
plaint against them is that they are having too much freedom. It 
is true that labor combinations have steadily increased during the 
last fifty years, and it is equally true that the laborers' industrial, 
social, and political freedom has increased more during that 
period than ever before. 

Nearly all opposition to labor combinations is ostensibly for the 
laborers' benefit. As early as 1831, when the trades union asked 
Parliament to reduce the working time of the factory operatives in 
England from twelve to eleven and a half hours a day, the proposi- 
tion was opposed on the ground that it would destroy the freedom 
of the laborer to work as many hours as he chose. And forty-five 
years later the same reasoning was presented in Massachusetts 
against the adoption of a ten-hour factory law. Edward Atkinson 
and others repeatedly pleaded against the measure on the ground 
of individual freedom, claiming that to limit the working day by 
law to ten hours was to deprive the working women (the law only 
applied to women and children) of their sacred right to make an 
individual contract to work as many or as few hours and for such 
wages as they pleased. Such reasoning implies that the factory 
women had previously enjoyed the precious boon of making 
individual contracts regarding their hours and wages. The fact 
is, however, that no such right existed ; there was never a time 
since the factory system began when the operative of either sex 
could make any such individual contract ; and prior to the fac- 
tory system and the existence of trades unions the laborer had 
neither part nor lot in determining either his wages, hours of 
labor, or any othe-r condition. Down to the fourteenth century 
the laborer was the property of his master. From the middle of 
the fourteenth to the close of the eighteenth century his industrial 
conditions were determined by statute law, in which he had no 
voice ; and during the first half of the present century they were 
determined by the employer.' The right or expediency of con- 

^ During the reign of Edward III., Richard II., and the Fourth and Fifth 
Henrys, the law was chiefly directed to regulating the laborers' wages, 
food, clothes, occupation, and mobility, coupled with severe penalties for 
violation. And during the next four hundred years (1425-1825) this was supple- 



FALSE NOTIONS OF FREEDOM. 419 

suiting the laborer in such things is a matter of recent date ; a 
fact which labor combinations have made possible and are fast 
making necessary. 

The mistake in this attitude arises from a misconception of 
what constitutes freedom. As already observed,' freedom does 
not consist in the negative permission to do but in the positive 
power of actual doing. The essence of freedom is power, and 
the source of economic and social power is wealth. Nothing can 
furnish the motive to associate but the fact that association 
increases the power to obtain desired objects. The history of 
freedom is the history of progress, and the history of progress is 
the history of industrial, social, and political integration or com- 
bination. Every movement tow^ards freedom is a movement 
towards greater economic and social interdependence between 
individuals. Interdependence involves mutual helpfulness, which 
in turn furnishes security of rights and the maximum free- 
dom of action. The difference between freedom furnished by 
savagery and that secured by society is that the former affords 
the freedom to injure while the latter gives freedom only to help 
our fellow-man, and thereby benefit ourselves. If trades unions 
were inimical to the laborers' freedom we should find more indi- 
viduality and freedom among unorganized than among organized 
laborers. The facts, however, are everywhere the reverse. In 
every country and industry it is the organized laborers who are 
the most characterful and progressive, and the most difficult to 
coerce or mislead, either industrially or politically. It is not cor- 
rect therefore, either theoretically or historically, that labor com- 
binations tend to destroy the laborers' freedom. 

3. The complaint that trades unions invade the rights of the 
capitalist to control his own business, is regarded as the greatest 
grievance by the employing class. When discussing this point 
however, it soon becomes apparent that the phrase, " preserving 
the laborers' right of free contract " really means nothing but the 
right of the employer to insist upon making contracts with 

mented by laws making it a penal offence for laborers to combine for the pur- 
pose of obtaining advance of wages, or for altering the hours of work." See 
Encyclopedia Britannica, vol. v., p. 181. Also, Rogers' "Six Centuries of 
Work and Wages," p. 399. 

^ See page 12. Also, "Wealth and Progress," pp. 131, 132. 



420 ONE-SIDED ECONOMICS. 

laborers individually. A very slight acquaintance with industrial 
experience is sufficient to show that the reason for this is, that in 
so doing the laborer is less able to make contracts to his own 
advantage. 

There is surely no principle in economics or equity which will 
not apply with as much force to the capitalist as to the laborer. 
If the capitalist has a right to object to the laborers acting col- 
lectively, the laborers have an equal right to object to the associ- 
ated action of capitalists. In truth however, such an objection 
on the part of either is the very acme of absurdity, because 
individual action has been rendered practically impossible on both 
sides by the very constitution of the factory system. Everybody 
is now aware that associated capital is practically indispensable 
to successful production. No matter how desirable it might ap- 
pear that each stockholder should directly participate in every 
transaction of the concern, such a town-meeting method is now 
utterly impracticable. That a considerable degree of associated 
and representative action is necessary for capital is generally 
admitted ; the individual contract system is literally insisted upon 
only for the laborer. All contracts for labor must take place 
between corporate capital and individual laborers. When the 
laborer purchases commodities he must buy individually from cor- 
porate producers, and when he sells labor he must sell individually 
to corporate purchasers. 

This position is as illogical as it is impracticable. Fortunately 
economic law makes such an one-sided arrangement impossible. 
The very conditions which have made the combination of capital 
necessary, have rendered a practical uniformity in the price of 
labor necessary for the same work in the same shop. It is mani- 
festly impossible for a concern employing several thousand 
laborers to make a special contract with each individual laborer 
as to the wages he shall receive and the hours he shall work. In 
the first place, a multitude of different rates of wages and other 
conditions would throw the whole concern into confusion. Every 
change of workman would be liable to involve a new price, and 
thus change the cost of producing the article. Since the labor of 
all the workmen is merged into a common product and sold at a 
uniform price, it would be impossible to know from week to week 
whether the selling price was above or below the cost of produc- 



INDIVIDUAL CONTRACTS IMPOSSIBLE. 42 1 

tion. This difficulty would be further increased by the fact that 
the productive capacity of operatives greatly varies, especially 
where men, women and children all work at the same occupation. 
It was this fact, together with the desire to spur the workman to 
his maximum effort, that led to the introduction of the piece-work 
system. It is needless to say that to have a special contract with 
each individual operative as to the price paid per unit of product 
is absolutely impracticable. 

Still another obstacle to individual contract is the fact, that 
under factory methods the tools are all driven by a single power. 
This makes it essential to the economy of the process that there 
be a uniformity of hours in order that all may commence and 
stop at the same time, because it involves about as much cost to 
run the machinery for a portion as for the whole number of 
operatives. Furthermore, since every department supplies but a 
fraction of the finished product, it is necessary that its quota 
should be furnished in a uniform proportion to all the rest, as 
any variation in this respect would be a disturbing hindrance to 
the whole concern. In other words, the workers in the seventy 
different branches in the manufacture of a shoe are simply inte- 
gral parts of a continuous process, and therefore must all conform 
to a general system of operations. It is as impossible for each 
operative to make separate conditions without regard to the rest 
as it would be to make the cogs of a wheel of different length, 
breadth, or thickness, without regard to each other. Individual 
contracts therefore, regarding wages, hours of labor, or other 
working conditions, are absolutely out of the question under the 
factory system. Indeed, no practical business man would ever 
seriously entertain such an idea. 

As a matter of fact, no such freedom on the part of the laborer 
to make an individual contract for himself, different from that 
under which his fellow-workman in the same shop or industry is 
working, is ever intended by the much-heralded phrase " free- 
dom of contract." All that is really meant by this phrase is that 
the employer should have the freedom to take the laborers singly 
in order to make them jointly accept his terms. It simply means 
that in making a contract, the laborer shall not have the same 
right to be represented by the most competent of his class or craft 
that capital has ; but that each one, however ill-informed or in- 



422 UNFAIR CONTRACT. 

competent to present his own case, shall be dealt with simply by 
the representative of corporate capital. Every time a laborer is 
induced, through ignorance or otherwise to accept inferior con- 
ditions, it increases the power of the employer to enforce similar 
terms upon others. Thus, while the uniformity of price for the 
same work in the same shop prevails, this method enables the 
employer to impose the maximum hardship and give the minimum 
pay that the superior men can endure, whereas if the laborers 
acted collectively, as the capitalists do, the more competent of 
their number could be chosen to negotiate the contract for the 
whole, thus preventing the inferior from being used as a means 
of destroying the contracting power of the superior. And since 
the contract made by the superior would always be as favorable 
or more so than that made by the inferior, the poorest laborers 
have every thing to gain and nothing to lose by associated or 
representative action. Any system of jurisprudence which should 
permit representation by counsel on one side and refuse it on the 
other, would throughout Christendom be pronounced as a scan- 
dalous violation of the principles of equity ; yet this relation 
obtains between employers and employed in the most civilized 
countries, except so far as it has been rendered impossible by the 
power of organized labor itself. 

As proof of the obvious one-sidedness of the individual-contract 
idea, it is only necessary to go into any large factory and read the 
printed rules which govern the conditions of employment. I have 
read scores of them. They are usually printed and posted up 
near the entrance of the factory, and they stipulate the various 
conditions of work the employers desire to impose. Sometimes 
these rules, miscalled contracts, appear to give the same rights to 
the laborer as to the employer. This, however, is usually fol- 
lowed by the qualification that in case of misdemeanor, inferior 
workmanship, or other cause, the laborer can be summarily dis- 
missed, and of these things the employer is the sole judge. In 
short, these rules are formulated and enforced exclusively by the 
employer. And when a new laborer is engaged he neither hears 
nor sees any thing of them but the mere fact that they are posted 
up in the factory, and that he was not coerced into taking the po- 
sition, is held to constitute a free contract, the conditions of which 
are legally binding, and are commonly so interpreted by the courts. 

It may be replied that this is the only practical way of doing, 



TRADES UNIONS AND WAGES. 423 

SO far as the employer is concerned. This is undoubtedly true ; 
but it demonstrates the impossibility of individual contracts ; 
hence the absurdity of objecting to labor combinations, on the 
ground that they destroy the laborers' freedom of individual con- 
tract. The right of individual contract means nothing, unless it 
means that every individual can make a contract for himself with- 
out regard to that of others. Experience has shown that such 
contracts are incompatible with a highly complex productive sys- 
tem. To the modern employer laborers constitute various parts 
of a vast productive machine, and hence must work in practical 
uniformity or not at all. This is not only true of the laborers in 
any given workshop, but it is practically true of the laborers in 
different workshops in the same industry, whose products com- 
pete in the same market. Thus it is the economic conditions of 
production, and not labor combinations, that have destroyed the 
feasibility of individual contracts ; and it is beyond the power of 
either laborer or capitalist, or both combined, to restore it with- 
out abrogating the factory system. Since both capital and labor 
now necessarily move in large aggregations, for organized capital 
to object to the existence of organized labor is manifestly as un- 
just as it is irrational and uneconomic. 

3. Another objection urged against labor combinations is that 
they are uneconomic in their character and methods. It is in- 
sisted that they cannot increase wages because wages are gov- 
erned by natural law, whose operation is beyond the influence of 
trades unions. That much of the conduct of trades unions has 
been uneconomic will not be disputed by any one familiar with 
their history. But it is scarcely less clear that this is mainly due 
to their acceptance of the capitalists' doctrine of wages, and not 
to any thing in the nature of labor combinations. This doctrine 
is that wages are regulated by the proportion between the 
demand for and supply of laborers, and consequently that 
nothing can increase wages which does not diminish the supply of 
labor, as compared with the demand. The supply of labor being 
determined by the number of the laboring population, any en- 
deavor to increase wages except by limiting the population was 
held to be a futile attempt to suspend the operation of natural 
law.^ A doctrine according to which wages could only be raised 

^ See Mill's "Principles of Political Economy," vol. i., p. 428 ; " McCul- 
loch's ''Principles of Political Economy," p. 174. ;. Perry's "Political Econ- 



424 STklRES AND CORNERS. 

by increasing the deaths or decreasing the births in the laborers* 
families was properly repugnant to them, though they were 
unable to answer it. While the laborers accepted the economists* 
theory, they rejected their means of applying it, and to their 
credit be it said, they endeavored to control the supply of labor 
without resorting to protracted celibacy or infanticide. 

Moreover, they were constantly having object lessons in the 
application of this doctrine by the employing class. Supply and 
demand being regarded as the law of prices as well as of wages, the 
capitalists had practically to deal with the same problem. With 
this exception, however, that in their case supply involved the ex- 
istence of commodities, in the case of the laborers it involved the 
existence of human beings. In acting upon this doctrine, the 
capitalists endeavored to regulate the price of commodities by 
withholding a portion of the product from the market — reducing 
the supply. This naturally led to corners and other forms of 
artificial monopoly, which are now recognized as social evils, 
especially as all such efforts are undertaken solely to increase 
the price of commodities. 

That the laboring class should imitate the policy by which their 
masters had apparently been so successful cannot be a matter of 
surprise. They naturally tried to do with labor what the capital- 
ists had done with commodities — namely, to limit the supply in 
order to increase its price, by withholding a portion of it from 
the market, which in their case is called a strike. Every strike 
for higher wages is simply the practical application of the doctrine 
of " supply and demand " to labor ; it is to the labor-market 

omy," 1st. ed., pp. 122, 123. Also Wells' " Recent Economic Changes," p. 
124. Cf. " Wealth and Progress," pp. 35-52. Nor can it be said that this doc- 
trine has been discarded although its fallacy has been repeatedly exposed. The 
fact that Mill practically gave it up before he died, rendered the wages-fund 
form of stating it unpopular. But the doctrine that wages are governed by the 
relative demand and supply of laborers has continued to be taught by the most 
scholarly economists. Cairnes tried to rehabilitate it after Mill's conversion. 
Jevons reaffirmed it, and it is the essential idea in the most recent discussion of 
wages by German, Austrian, English, and American writers. And Marshall in 
his " Principles of Economics," (1890) which is characteristically the embodi- 
ment of the most recent discussion of the subject by continental and American 
writers, makes supply and demand the basis of all his reasoning on Distribution 
and Exchange. 



FUNCTION OF COMBINATIONS, 425 

precisely what a corner is to that of commodities. And yet this 
is precisely what economists have taught in theory and the 
capitalists have illustrated in practice. Thus the feature in the 
combination of capital which the public most oppose, and that in 
the combination of labor which the employing class most con- 
demn, is the logical result of the popular doctrines of prices and 
wages, and not a necessary part of industrial combination, either 
of capital or of labor. 

We have already seen that the arbitrary and speculative feature 
of the combination of capital is the incident, and that its normal 
function is to increase the economic efficiency of production and 
reduce the price of commodities ; and also that the former is 
diminished and the latter increased as the progress of society 
advances. A very little consideration of the subject will show 
that this is equally true of labor combinations. Not only have 
the rise of wages and the general freedom of the laboring classes 
everywhere advanced with the growth of trades unions, but these 
organizations have been one of the most efficient means in pro- 
moting that end. The reason for this is obvious when considered 
in the light of the doctrine of wages already stated. When we 
realize that cost, and not the mere ratio between quantities, is the 
chief determining influence in prices, the importance of labor com- 
binations as a means of raising wages is easily understood. Upon 
the principle that the cost of labor is high or low according to 
the simplicity or complexity of the social environment, it follows 
that whatever increases the laborer's social opportunities — i.e., 
forces him into more frequent contact with an increasing variety 
of social influences, necessarily tends to increase his wages, and 
this is precisely what labor organizations do. 

Isolation is social death. The poverty of the laborer's social 
life has always been the lack of social opportunity. For centuries 
the only opportunity for social intercourse open to the laborer 
outside of his meagre family circle and the church was the tavern. 
During the middle ages and practically down to the present cen- 
tury the church and the tavern or inn were the most prominent 
social institutions. Although the church was the centre of culture 
and refinement and furnished what there was of art and music, 
its attitude towards the laborer was always that of authority. It 
bade him obey under penalty of endless punishment. It afforded 



426 CHURCH AND TA VERN. 

him little if any opportunity for social intercourse with his peers, 
where he could talk over his grievances on equal terms with those 
whose experience was practically like his own. 

Social intercourse for the laborer, of a democratic character, 
was first furnished by the tavern. There the laborers, tired 
and heart-sore, with no industrial, social, religious, or political 
rights which their superiors were bound to respect, could meet 
over a mug of beer, relate their hardships to one another, and 
exchange sympathetic encouragement. By such social inter- 
course the laborers not only became more acquainted with, and 
interested in, each other, but the more intelligent and characterful 
among them were naturally inspired to suggest various methods 
for improving their condition and demanding new rights and 
greater freedom. Thus, by affording social opportunity, the 
tavern was one of the early instruments of social progress ; it 
may indeed be said to have been the birthplace of free speech 
for the masses.' What the tavern was to the early peasantry 
the trades union is to the modern laborer. Indeed, for the first 
half of the present century the trades union was really a differ- 
entiation of the tavern meeting. Instead of meeting in a general 
social way, they met for discussion and united action regarding 
their special industries. 

The trades union tends to develop the intelligence and charac- 
ter of the laborers in many ways. In the first place it stimulates 
the study of industrial conditions, which involves a considerable 
amount of reading and general information, and also a close 
acquaintance with the industrial condition of their craft. The 
discussion of the various propositions which arise for considera- 
tion develops individual confidence, force of character, and a 
consciousness of industrial rights and social power, not only in 
those who actively participate, but in all who attend. In short, 
the trades union is a great educational institution ; it is the eco- 
nomic academy of the laboring class and is practically the only 
opportunity for industrial education they have ever had. 

^ The need of the tavern as a social resort will be better understood when we 
realize the fact that the first public meeting ever held in England for the open 
discussionof political rights did not take place till 1769. See Buckle's " History 
of Civilization," vol. i., p. 311. Also Hallam's " Constitutional History," vol. 
ii., p. 420. Cook's " History of Party,'' vol. iii., p. 187. Albemarle's 
" Memoirs of Rockingham," vol. ii., p. 93, 



SOCIAL EFFECT OF LABOR UNIONS. 427 

Moreover, the labor union is an important social centre ; in 
addition to furnishing the laborers with the means of a better 
knowledge of their economic conditions, it affords a degree of 
opportunity for social intercourse otherwise practically impossible. 
It is to the laboring class what clubs and other social institutions 
are to the wealthy. The social intercourse and activity thus 
created (which is frequently extended -to their families and 
friends) necessarily awaken new tastes, wants, and aspirations. 
Nor is the influence of this limited to the personal character 
and home life of the members of the association, but the social 
rivalry between different organizations is equally pronounced. 
So strong is this that a class feeling often exists between trades 
as to their social position, the test usually being the wages paid 
in their trade and the financial strength of their organization. 
Thus, on all public occasions, they vie with each other as to 
which shall make the most opulent appearance. This social 
competition necessarily furnishes the incentive to new desires 
and ambitions involving a greater variety of social life and a 
more expensive standard of living. 

The pressure of the increased necessities thus unconsciously 
developed makes a demand for an increase of wages necessary. 
This, of course, does not come suddenly ; it is felt first and most 
keenly by those who have been most susceptible to the social- 
izing influences and whose cost of living has been most increased. 
Their expenditure begins to press uncomfortably against their 
income, until finally they are unable to make both ends meet. 
Those who first begin to experience this hardship, being the 
most expensive of their class and usually the most intelligent 
and characterful, bring the matter before the union and advocate 
a general demand for an increase of wages. When this feeling is 
shared only by a few, they fail to carry their point. 

Since it is impossible both from the nature of the factory sys- 
tem and the constitution of labor organizations to make special 
terms for individual cases, the only way for the most expensive 
laborers to secure an increase of wages for themselves is to ob- 
tain the same for their whole trade. Being thus compelled to 
rise together, or not at all, it becomes necessary to inspire their 
associates with substantially the same feelings and ambitions 
they experience themselves. To do this they are forced to argue 



4^^ TRADES UNIONS, ECONOMIC. 

questions over and over again, showing not only the necessity 
but the feasibility of their proposition. When they have suc- 
ceeded in convincing twenty or thirty per cent, of the most char- 
acterful in their union of the wisdom of their demand, the re- 
mainder usually follow. With this united action of the whole 
class they invariably succeed sooner or later in obtaining the 
increase of wages or other improved conditions desired. All 
this is educational and socializing in its influence. It is through 
organizations which thus practically weld the laborers into a 
social class that the economic condition of the whole is improved 
by the efforts of a small but the most advanced portion. 

It will thus be seen that trades unions are essentially economic 
institutions ; instead of being inimical to the laborer's interest 
and a menace to capital, they are a most important feature of 
modern society. For the same reason that nothing can perma- 
nently reduce the price of commodities, which does not diminish 
the cost of production, nothing can permanently advance wages 
which does not increase the laborer's cost of living. And upon 
the same principle that the combination of capital increases the 
facilities for diminishing the cost of production, the combination 
of labor increases the opportunity for increasing the laborer's 
necessities and cost of living. It is by their opportunity-creating 
influences, and not by their power to limit the number of labor- 
ers, that trades unions ever permanently afi^ect wages. Of course 
they resort to strikes as a means of enforcing their demands when 
petitions and other more moderate forms of request have failed ; 
not because it limits the supply of laborers, but because a con- 
siderable portion of the laborers are acting under the pressure of 
a social necessity, which if not satisfied will involve a protracted 
social conflict. 

It is commonly assumed that the conducting of strikes is the 
chief function of labor unions. This is as erroneous as it would 
be to say that the chief function of organized capital is to con- 
duct lock-outs. Strikes are among the most reluctant and the 
least beneficial functions trades unions perform. It is indeed 
notorious that strikes diminish as labor organizations increase 
in extent and efficiency. It is a fact well known to those con- 
versant with the history of labor organizations, that far more 
strikes have been prevented by the officers of trades unions than 



HOURS OF LABOR REDUCED. 429 

were ever inaugurated by them. It is, however, through their 
united efforts as industrial organizations and as the means of 
concentrating the political influence of their class to promote in 
a multitude of ways the improvement of their social condition, 
that the trades unions have done their best work. Take, for ex- 
ample, the reduction of the hours of labor ; this they have persist- 
ently advocated for more than forty years, and in spite of the 
almost united opposition of the employing class, have succeeded in 
shortening the working time in almost every civilized country, in 
many instances from fourteen to ten and nine, and in some cases 
to eight, hours a day. It is due to their efforts that night-work 
for women and children in factories was prohibited, education for 
working children secured, and the truck system with numerous 
other degrading features of the factory system abolished. It 
may indeed be said that nearly all the improvements in the sani- 
tary and social condition of modern workshops which have taken 
place during the last generation are directly or indirectly the re- 
sult of the indefatigable efforts of labor combinations. The rise 
of wages is the secondary effect of these social improvements, 
which are simply so much added opportunity for individual 
development. 

It is not pretended that these organizations furnish the only 
social opportunity the laborer enjoys ; it is of course true that he 
obtains some share in the benefit arising from the general progress 
of society, but the degree in which he is thus benefited largely de- 
pends upon the social preparation he receives in his own special 
sphere. Suppose, for example, the mass of laborers continued 
to work in an unwholesome atmosphere under demoralizing con- 
ditions for twelve or more hours a day, and to spend their nights 
in dismal tenements, compared with which a very ordinary saloon 
is a wholesome attraction. The general culture of society would 
have but a very slight influence upon their social life. This much- 
needed preparatory social opportunity is what the trades union 
largely supplies. It does this first through the social intercourse 
and inspiration it directly furnishes within its organization, and 
next by its persistent efforts to modify the form of labor and 
diminish the amount of time the workshop shall exact from the 
laborer's life, and by increasing that which is added to it by 
leisure, and the general humanizing influences of society. Labor 



430 CHARACTER THE BASIS OF WAGES. 

combinations, therefore, tend to promote the increase of wages in 
the most truly economic way possible, which is by stimulating the 
growth of the laborer's social wants and desires, and by promo- 
ting industries, education, and the possibility of united, intelligent 
action in economic and social affairs. 

There is no force in society that can secure a permanent rise 
in wages unless the social necessity for it is previously developed. 
When strikes take place for an increase of wages, or any other 
object, before the demand of a considerable portion of the laborers 
has ripened into a necessity for it, they generally fail. It is always 
the most intelligent and characterful, whose habitual consumption 
presses the hardest against their income, who are the most cautious 
about entering upon a strike, and the most persistent in their en- 
durance after the conflict commences. On the other hand, that 
portion of the class which has a little bank account or a mortgaged 
cottage, are the first to surrender when the real hardships of the 
struggle begin to appear. The reason for this, however, is not 
that they are inherently less heroic than the others, but that the 
advance in their standard of living has not outgrown their wages 
to the same extent. Consequently, the hardships arising from 
the insufficiency of their wages are less severe than those of the 
others ; hence their early surrender. In other words, their effort 
to obtain the advance is relatively weak because the consciousness 
of its necessity is relatively slight. And, conversely, those whose 
necessary expenditures press the hardest upon their incomes 
suffer the greatest inconvenience from the smallness of their 
wages, and hence will endure correspondingly great hardships in 
the efforts to obtain an increase. 

It is, however, to the ill-advised strikes and other rash conduct 
of trades unions that we are usually referred as evidences of 
their evil influence. We are told that they are dictatorial, that 
they arbitrarily disturb trade and industry, destroy the profits of 
capital, and involve untold hardship upon the laboring class by 
loss of wages. It is, indeed, one of the favorite themes of the 
opponents of trades unions to foot up, periodically, how much 
the laborers have lost in wages through strikes, and to point out 
that they are the dupes of dishonest leaders. 

This method of estimating the social and economic merits of 
labor unions is at once specious and misleading. Judged by such 



GAIN AND LOSS BY STRIKES. 43 I 

a standard, almost every great movement for social and political 
reform would have to be voted a failure. The Wat Tyler insur- 
rection, the uprising of the Roundheads against Charles I., the 
Protestant Reformation, the Revolution of 1688, the French and 
American Revolutions, and our Civil War, all cost more finan- 
cially than was immediately realized from them. But if the results 
of these struggles are estimated in their permanent effect upon 
social well-being, they were all great successes, yielding indefi- 
nitely more in benefits than they cost in sacrifice. 

So it is with labor unions, notwithstanding their many mis- 
takes. It is a great error to assume that, because a strike fails 
to accomplish the specific object for which it was inaugurated, 
the money and energy expended upon it are wasted. On the 
contrary, the educational effect of an unsuccessful strike on the 
employer and the public, as well as on the laborer, is often worth 
more than all it costs. But if these efforts are judged by their 
permanent effect upon the material and social well-being of the 
masses, they will have to be regarded as great successes even in 
a financial sense, to say nothing of the social and moral advantage 
resulting from the reduced working hours and improved indus- 
trial conditions they have secured. The increase of wages during 
the last forty years is many times greater than all that has been 
spent or lost through strikes since the dawn of the factory sys- 
tem. Indeed, the amount the laborers in this country and Eng- 
land have received through increased wages since 1850 is nearly 
equal to all they received during the previous fifty years. But 
what is still more important, all this gain will not only continue 
in the future without any further effort, but will furnish a power- 
ful lever by which to obtain still greater improvement. 

The laboring classes therefore are not permanently impover- 
ished by what they pay into unions or lose in strikes. It should 
be remembered that their losses are only temporary, while their 
gains are permanent. Thus when they strike for an increase 
of wages or reduction of hours, if they fail to obtain that specific 
object their loss is slight, since their future wages are not reduced 
nor their hours increased on that account ; but if they succeed 
they obtain a permanent gain. In other words, when they fail 
they practically hold their own, and when they succeed they 
gain forever. 



432 UNFAIR CRITICISMS. 

That many strikes are unwisely inaugurated and badly man- 
aged would be readily admitted by those acquainted with the 
history of labor organizations. Nor will it be disputed that dis- 
honest men, or men otherwise conspicuously unfit for leader- 
ship, sometimes get at the head of labor organizations. But is 
this not true of every other form of social and industrial organ- 
ization ? Are capitalist organizations free from these charges ? 
Do they not frequently act rashly and undertake enterprises in 
which thousands of innocent confiding investors (often women, 
children, and orphans) lose their little all ? Have they not their 
Grants and Wards, whose rash (or worse) conduct often disturbs 
the whole commercial and industrial world, bringing bankruptcy 
and ruin to large numbers ? 

Cannot the same impeachment be urged with quite as much 
truth against political combinations, social clubs, and even 
churches ? Would any one venture to say that because there 
are dishonest railroad presidents and corporation treasurers, the 
combination of capital should be prohibited, and because there 
are dishonest and incompetent deacons and ministers church 
associations should disband ? Why should working men be ex- 
pected to be more honest and wise than any other class in the 
community ? Why should perfection be demanded of them, when 
liability to err is conceded to every one else? Since all other 
social institutions are to be judged by their virtues, why should 
labor organizations be judged only by their mistakes ? Considering 
their limited opportunities and the extent of the forces arrayed 
against them, the wonder is not that the laborers have made so 
many mistakes, but rather that they have succeeded at all. 

Another characteristic of labor combinations, which should not 
be overlooked, is the marked improvement in their methods of 
dealing with industrial disputes. In proportion as trades unions 
become more complete in their organizations, and their members 
more intelligent, they have become more rational and conserva- 
tive in their attitude. Whereas physical force, often involving 
the destruction of life and property, was once their chief means 
of warfare, they now mainly rely upon reason and facts as their 
economic weapons. Consequently we find to-day that in those 
industries where trades unions are best organized and exercise 
the greatest influence, strikes are fewest, wages are highest, hours 



TRADES UNIONS NECESSARY. 433 

of labor shortest, and the relation between laborers and employers 
the most confidential and harmonious. 

Trades unions therefore are not only legitimate, economic, and 
social institutions, but they are an integral part of the industrial 
organization of modern society. They are the economic counter- 
part of the combination of capital, and their existence and devel- 
opment are equally necessary to the harmonious development of 
society. It is an entire mistake, therefore, to regard trades unions 
as necessarily a menace to industry and social welfare ; they are 
constitutionally important educational institutions, and whether 
they will be a power for good or for evil in society depends upon 
what they teach and how they teach it. Since labor organizations 
are the most effectual, and nearly the only means of furnishing 
the opportunities for economic education to the wage workers, 
instead of trying to degrade and suppress them, it is alike the 
interest and duty of both the employing class and the community 
to encourage their development and increase their usefulness. If 
capitalists would devote one tenth the means for helping labor 
unions to provide for more comprehensive and correct knowl- 
edge upon economic and social questions that they devote to 
opposing them, these organizations would become the source of 
sound economic education and the training schools for intelligent 
citizenship, instead of being the nurseries of industrial and social 

antagonism. 
28 



SUMMARY AND CONCLUSION. 

In the preceding pages I have endeavored to discuss the gen- 
eral principles which govern the economic relations of society, 
and to indicate briefly their application to practical affairs. It 
will be observed that this treatment of the subject widens the 
sphere of economics, in that it applies these principles to society 
instead of limiting their application to wealth or value. There- 
fore instead of the principles of physical economics, which 
political economy has hitherto taught, we have the principles of 
social economics, a system which recognizes the tastes, habits, 
and character of man, as the source of all economic movement, 
and the development and perfection of man as the goal of social 
evolution. Since this is a departure from the traditional meth- 
ods of discussing economics and involves the consideration of 
the whole subject from a different point of view, it may be well 
to briefly summarize the leading principles laid down in each of 
the four parts as follows : 

Priiiciples of Social Progress. — Social progress is here consid- 
ered as a gradual movement of society towards a greater definite- 
ness of economic and social relations, specialization of functions, 
and interdependence of individuals and classes, and an increase 
of wealth, power, and freedom for the individual, with a diminu- 
tion of the arbitrary function of government. This movement 
has two characteristic phases, distinguishable as industrial and 
social. The former relates to the means of sustaining life, and 
the latter to the mode of enjoying life. The development of 
these two phases of progress in society is indicated respectively 
as follows : In economics by a movement towards the de-indi- 
viduation and aggregation of productive force — both of labor 
and capital, — the individuation of management and responsi- 
bility, and the socialization of results in the form of more, better, 

434 



SOCIAL AND ECONOMIC PROGRESS. 435 

and cheaper products. In society and politics it is indicated by 
a movement towards increasing the sovereignty of the individual 
and diminishing governmental authority. This produces two 
changes in the laborer's condition : one specializes and limits 
his economic function, the other generalizes and extends his indi- 
vidual and social function. Thus in proportion as the laborer's 
industrial individuality diminishes and he loses the economic 
power to employ himself, his social and political individuality 
increases, and he gains the power to control his employer ; and 
this power he will use to the detriment of existing interests and 
institutions if his well-being is neglected or impaired. Therefore 
as civilization advances, the prosperity and safety of the whole 
community depend more and more upon the industrial and social 
welfare of the laboring classes. The correctness of this view 
is sustained by universal history, which shows that civil and 
political freedom have everywhere followed the material pros- 
perity of the masses, and this has everywhere been characterized 
by specialization of labor, concentration of capital, and private 
responsibility in industrial enterprise. 

Principles of Economic Production. — Production is treated as 
the creation or increase of transferable utility. Since nothing 
has utility which does not serve human wants, effective desire- or 
consumption is the cause of production. Industrial progress 
primarily consists in cheapening wealth, the test of which is the 
increase of material well-being obtainable for a day's labor. It 
is a universal law in economics, that productive efficiency is 
increased and wealth is cheapened according as natural forces 
are substituted for labor. Natural forces can only be harnessed 
to production by the use of capital, and capital can only be 
economically employed under conditions of increasing returns. 
Increasing returns are only possible with a relatively larger 
market, and this depends entirely upon the increase of consump- 
tion per capita in the community. Large consumption, which 
means high-priced labor, is one of the prime causes of cheap 
wealth. 

Value is here treated not as the ratio in which things exchange 
for one another, but as the ratio in which wealth exchanges for 
service. Economic prices are high or low, things are dear or 
cheap, solely in proportion as a smaller or larger amount of them 



436 PRODUCTION AND DISTRIBUTION. 

will exchange for a day's labor. A commodity at 50 cents in 
China, a dollar in Russia, or $1.50 in England, maybe very much 
dearer than at $2 in America. To repeat this in another form, the 
economic status of wealth is determined absolutely by the ratio in 
which it will exchange for service as an economic equivalent. The 
basis upon which economic equivalents are determined is not 
quantity but cost. Therefore economic value or prices are not 
determined by the ratio between demand and supply, but by the 
cost of production. Under free competition in open market, the 
price of any given commodity tends towards uniformity, on the 
basis of the cost of producing the dearest portion of the supply in 
that market. Cost of production is determined not by the quan- 
tity of labor expended, but by the aggregate cost of labor directly 
or indirectly devoted to its production, and since large consump- 
tion induces the economic use of machinery, which saves labor 
and diminishes the cost of production, high wages promote low 
prices. 

Principles of Economic Distribution. — The distribution of wealth 
is not a distinct economic function, but an inseparable part of 
the process of production. Economic distribution takes place in 
the form and order of wages (and salaries), rent, interest, and 
profit. Consequently, the social theories based upon the assump- 
tion that wages are determined by what remains of the product 
after rent, interest, and profit are deducted, as held by socialists, 
and practically supported by Jevons and Walker, are erroneous. 
Wages differ from rent, interest, and profit, in that they are 
economically cost, while rent, interest, and profit are surplus. 
Wages, being the price of labor, are determined by the same law 
as the price of commodities, namely, the cost of furnishing the 
dearest portion of the necessary supply, and are necessarily 
added to the price of commodities ; while rent, interest, and 
profit, being surplus, are not items in the cost of production 
by which the price is determined, hence do not enter into the 
consumer's price of commodities, so that prices are not higher 
or wages lower by virtue of rent, interest, and profit. The 
chief problem, therefore, to consider in connection with the dis- 
tribution of wealth is wages. To increase wages is to increase 
the income of all who participate in productive enterprise, and 
this in turn extends the market for products, diversifies industry, 



FOREIGN AND DOMESTIC RELATIONS. 437 

and makes the various forms of surplus possible. In other 
words, the prosperity of all the other classes of the community 
finally depends upon that of the wage-receiving class. Con- 
sequently, the economic problem of society is not one of re- 
ducing rents, regulating interest, or abolishing profit, but it is a 
problem of increasing wages which finally depend upon the 
wants, habits, and character of the laboring classes. 

Principles of Practical State Sfnans hip. — In applying the princi- 
ples of economics to the practical affairs of society, it should be 
observed first of all that the functions of government are es- 
sentially of a protective^ educational, and judiciary character. 
Therefore, while practical statesmanship has to deal with an 
infinite variety of circumstances, the machinery of government 
should be employed only upon the principle of protecting or 
enlarging the industrial, social, or political opportunities of the 
individual. This should be the test of every change in public 
policy of whatever character. 

Applied to international relations, this principle involves what- 
ever is necessary to secure to the people of a nation the op- 
portunities for developing their highest industrial and social 
possibilities. This may take the form of protecting the people 
against forceful molestation by military invasion or an encroach- 
ment upon their political or territorial rights, or it may take the 
form of protecting them against an industrial invasion, in which 
the development of their home industries is menaced through the 
underselling of their products by those of lower-paid labor in 
less civilized countries. 

Applied to domestic relations, the principle implies whatever 
is necessary to protect the individual in all the rights and privi- 
leges he now enjoys, and to increase in every possible way the 
opportunities for developing his character and capacity for 
assuming a still greater degree of individual responsibility and 
freedom in every sphere of life. In the first place, the policy of 
government should always be to encourage individual enterprise 
by securing the greatest possible freedom to capital consistent 
with business integrity and social safety. In other words, it 
should be the guardian of the interests of the community without 
assuming business responsibility. In the next place, it should 
not only protect the laborer's industrial and social rights, but it 



438 POLICY FOR THE FUTURE, 

should employ all possible means for improving his industrial 
and social condition. 

This is of fundamental importance: (i) because the laboring 
classes constitute the great mass of the community, and therefore 
most truly represent society ; (2) because under democratic in- 
stitutions, public integrity, political and social freedom, depend 
upon the intelligence and character of the masses ; (3) because 
under factory methods of production material prosperity and 
social welfare finally depend upon the consumption of wealth by 
the laboring classes. 

Thus it appears that, whether we consider the social question 
from the stand-point of the general progress of society, as indicated 
by the advance of personal, political, and religious freedofn, or 
from the standpoint of industrial progress, as indicated by the 
development of labor-saving and wealth-cheapening methods of 
production and the more equitable distribution of the products 
of industry, as indicated by the increase of wages, or from the 
standpoint of practical statesmanship, as indicated by legislation, 
we find it all ultimately resolves itself into the problem of 
developing the character, individuality, and social life of the 
masses. When this fact shall become the accepted basis of 
public policy, the true economic relation of the laborer to the 
welfare of society will have been recognized for the first time, and 
one great step will have been taken . towards the solution of the 
social problem. 

Herewith is reached the end of our journey along the paths of 
industrial human development. Dimly lighted as it has been by the 
researchers and thinkers of the past, our way has been found 
only by closely following the light of facts. No theories have 
been allowed to stand against fact. No reasonings have been 
sustained in spite of fact. No propositions have been given 
credence contrary to fact. If novel and paradoxical conclusions 
have been reached, it has been in humble obedience to facts. If 
we have found the solution of many problems hitherto dark and 
tangled, it is fact that has unravelled the complexities of the 
subject. If many questions heretofore explained in tortuous 
methods difficult to follow have been given the guise of sim- 
plicity, it is because facts have been able to furnish a simple 
explanation. 



A BRIGHTER FUTURE. 439 

That this book issues in a system of social development at 
once pleasant, profitable, and promising the greatest good, is 
agreeable to me, and should be to the reader. It may at first 
repel orthodox experts in political economy who have thought 
so long on the old dismal lines that nothing agreeable seems to 
them possible from the workings of economic law. Steeped in 
the dreary reflections of Malthus, Ricardo, Mill, and the rest, 
they may indeed reject with scorn any thing that opens a more 
cheerful view. But the world actually goes from good to 
better perpetually, despite their awful predictions. Men are 
richer, brighter, more virtuous and happy, wiser, stronger, 
and healthier than they ever were, and we have simply pointed 
out the principles that have brought them to this finish. The 
human race is on the road to better estates. Long ago it set 
out on its unknown and perilous journey. At the time when 
the first men learned to trust their brains instead of their muscles 
the march was begun, and still it goes on. Every day sees 
some new attainment of the human mind, some new conquest 
over its environment, and every day sees more and more men 
included in the general enrichment and enlightenment. The 
world becomes more peaceful, more industrial. The rewards of 
industry become greater ; the general comfort is increased ; the 
powers of production prevail ; education becomes more general 
and varied ; nature is subdued and harnessed ; political freedom 
waxes, civil broils decline, occupations are diversified, cities 
multiply, vast organizations are formed to contribute to human 
welfare, and machineries proffer their million fingers swifter 
than arrows, surer than muscles, more tireless than thought, to 
the workshops of mankind. There are formed the countless ob- 
jects of human desire, most potent of all earthly forces. Steam 
drives the machinery, but human desire drives the steam. Out 
of man the movement springs, for him it labors, him it improves, 
and there is no limit to it. It has the nature of the infinite. 
The more it gets, the more it wants ; the more it does, the more 
it aspires to do ; the higher its advancement, the higher mounts 
its ambition. 

Still no advantage is gained by magical methods such as 
those suggested by our modern dreamers of dreams, but all is 
accomplished by the well-known and powerful methods al- 



440 THE VIRTUE OF NEW DESIRES. 

ready at work among us — our present benefactors. No sequestra- 
tion of the rents of land, such as Mr. Henry George is pleased 
to advocate, has any share in the advance. How could it have, 
when one sees that the more land there is to the person the 
worse off all persons are ? The steppes and the untilled prairies 
are the habitation of the idle nomad and the painted savage. 
Miles of land per man, but no wealth. Men are richest where 
each has least land, as in the teeming cities. " To every man his 
own farm " is a motto of barbarism. Anti-poverty societies would 
find plenty of land their death-warrant. It is to escape the bovine 
monotony of farm life that men throng to cities and towns, where 
intelligence is general and the resources of the individual enlarge, 
where the interchange of human sympathies and criticism stimu- 
lates thought and develops civility, where, as in a beehive, socia- 
bility supplants the dull hut of the lonely agriculturist, with whom 
new thoughts are as rare as roses in January. 

Nor is progress to be speeded after any such fashion as Mr. 
Bellamy has pictured, nor by the methods advocated by socialists. 
Work and system, organization and struggle for better materials, 
more productive energies, wiser laws, clearer principles, nature 
better understood and made more obedient, will always be the 
real agencies of amelioration. And by the use of these means 
more intelligently applied and more completely developed, the 
human race may legitimately and soberly expect to reach the 
goal of its most sanguine expectations. To reach it quickly the 
main thing is to widen human desires. The true ideal is that 
everybody should want every thing enough to be willing to work 
for it and to get it, since this is the source and fountain of prog- 
ress. No wants means no advance. 

The first economic duty of society and government is con- 
stantly to stimulate desire. If the English in India could make 
the Hindoo laborer want more things, they could soon civilize 
him up to their own standard. If the Russian peasants were not 
content with so little, the development of Russia might run on at 
equal speed with that of the United States. If our Indians could 
only be made to want houses and steam machinery and good 
clothes enough to work for them, the Indian problem would solve 
itself in a single decade. If the Southern negro could be made 
discontented with his slovenly hut, his scanty clothing and food, 



WEALTH FOR ALL IS CHEAPER THAN POVERTY. 44 1 

the race problem would dissolve ; and if our own poorer classes 
could only be made to crave better homes, better amusements, 
better food, with better surroundings, the problem of poverty 
would soon disappear, since they would universally begin to get 
them. 

To desire things is the first step in social progress, and this de- 
sire no sooner sets in with force than it begins to establish a new 
form of society. More wants means more factories, more ma- 
chinery, cheaper products, our laborers more steadily employed, 
capitalists more comprehensive and adventurous. Enterprises 
on an ever enlarging scale are called for to produce the desired 
result, — enterprises surpassing in their extent all the trusts yet 
devised, controlled by individual management, under abler cap- 
tains of industry than have yet appeared, and delivering cheaper 
products to be used by larger proportions of the people. 

The laborer must become more specialized as a laborer, though 
more generalized as a man. His welfare must be seen to be 
the welfare of the community, because he is really seven tenths 
of the community, and his interest must be more and more 
considered by all classes, as carrying with it the welfare of the 
rest. When employers understand their true interest the stupid 
and stolid resistance which they have long made to his progress 
will give way to a genial and hearty co-operation in all that makes 
for his advantage. They will realize that in his advancement lies 
their own prosperity. 

Then the future will be much brighter and happier, and larger 
numbers of men will succeed to a secure and pleasurable career. 
Since fifty years of devotion to industrial pursuits have wrought 
the wonders we know, and led mankind from the days of plague, 
pestilence, and famine, from general illiteracy, isolation, and 
superstition into the prosperity and progress of to-day, what will 
it be when a thousand years of intelligent progress have wrought 
out the possibilities of human development ? When nature well 
understood and well harnessed to the supply of millions of human 
wants shall furnish the riches of her storehouse, abundance for 
all will be more easily obtained than is the little which the great 
mass of mankind now receives. 



INDEX. 



Agriculture, origin of, 7 ; not the basis 
for price of manufactured products, 
102 ; its price finally determined by- 
cost of production, 133, 134, 135 ; 
unfavorable to savings, 212 ; unlike 
manufacture, 323 

Altruism, conscious and unconscious, 
20 



B 



Bastiat, his economic cycle, 1 1 1 
Brassey, Thomas, 142, 143 
Buckle, 18, 28, 40, 43, 50, 55 
Business depressions, conditions un- 
der which they occur, 382 ; distin- 
guished from famines and panics, 
383 ; historical facts, 384 ; cause of, 
386 ; outcome of false economics, 
390 ; remedy for, 386-396 



Cairnes, 109 

Capital, the term, how employed, 75 ; 
not the result of abstinence, 77, 79, 
243 ; an effect of social progress, 
80 ; cause of, 85, 89 ; receives the 
equivalent of its cost, 123 ; its na- 
ture and function, 124, 146 ; success- 
ful use of, has not been explained, 
147 ; no-interest capital, 239, 240 ; 
movement of, 241, 242 ; why cap- 
ital should command interest, 243 ; 
benefits of concentration of, 264, 
276, 279, 348 (see also Combina- 
tion of capital), 399-415 

Charity, static nature of, its relation 
to individuality, 310 



Civilization, modern, begins with the 
"artificers" of the ninth century, 
9 ; mercantile class create a new era 
in, 10 ; basis of a progressive, 14 ; 
tendency of, 21 ; how caused, 25, 
26 ; ancient and modern, 28-31 ; 
criterion of, 31, 86 ; fall of ancient, 
32 ; influence of the free cities J 
upon, 38 ; ancient and modern, com- 
pared, 86 ; cause of social deca- 
dence, 88 ; how related to capital, 
415 

Clark, J. B., 144, 146, 192, 195, 197, 
199, 308, 309 

Combination of capital, its effect on 
production, 399 ; its effect on com- 
petition, 400, 405 ; its economic 
movement, 406, 407 ; its effect on 
wages and prices, 407, 408, 409, 
410, 412 ; abuses of, 413, 414 

Combination of labor, inconsistent 
attitude toward, 416, 417 ; its effect 
upon the laborer, 418 ; its relation 
to right of contract, 418-423 ; 
sources of opposition towards, 424 : 
it imitates capital, 425 ; it increases 
social opportunity, 426 ; its effect 
upon the laborer's intelligence and 
character, 427 ; its relation to wages, 
428 ; its bearing on strikes, 429 ; 
how it affects wages, 430 ; abuse of, 
431 ; permanent effects of, 431-433 

Competition, its economic character, 
329 ; true basis of, international, 
335 ; the law of, 337 ; false notions 
about, 349-354 ; relation of, to com- 
bination of capital, 401 ; influence 
of, not dependent upon number of 
competitors, 402 ; its relation to 
combination of capital, 402 ; not 
dependent upon actual presence of 



443 



444 



INDEX. 



competitors in the market, 403 ; in- 
fluence of, potential, 404 ; effect of, 
potential on large combinations, 404 

Comte, Aug., 18 

Consumption, Adam Smith's miscon- 
ception of, 77 ; the basis of produc- 
tion, 80 ; the measure of want, 81 ; 
the cause of production, 82 ; its re- 
lation to labor-saving methods, 84, 
85 ; its relation to production, 146 ; 
wages the measure of, 148 ; how 
arrested, 388 ; errors regarding, 389 

Cost, variation in, explains law of 
prices and of profits, 249. 



D 



Demand and supply, doctrine stated, 
100 ; based on agricultural phe- 
nomena, lOi ; not applicable to 
manufactured products, 103 ; Ri- 
cardo's views, 104 ; economic price 
not determined by, 107 ; McCul- 
loch's view, 108 ; Cairnes' miscon- 
ception of, 109 ; their relation to 
consumption and production, in ; 
their economic relation, 114 

Discoveries, two kinds of, 87 

Distribution, not separable from pro- 
duction, 175 ; definition of, 176 ; 
four important facts concerning, 
178 ; economic order of, 178-183 

Draper, 18, 31, 32 



Employer, reason for the antagonistic 
attitude of, toward laboring class, 
390 

Enforced Idleness, how produced and 
how prevented, 395, 396 

Ethics, position of, in social progress, 

1 9 ; prevailing misconception of, 

20 ; basis of, 20 ; evolution of, 24 



Factory system, rise of, 56 ; its rela- 
tion to the labor market, 327 ; un- 
necessary phases of, 385 ; effect of, 
on relation of the laborer to the cap- 
italist, 391 

Family, origin and development of, 6, 
7 ; marriage by purchase, by cap- 
ture, its growing sacredness, 8 ; the 
tribal, patriarchal, and manorial, 9 

Feudal system, its development, 9 ; 
superseded by national life, 10 ; its 



abolition, 43 ; character of, in Eng- 
land, 44 

Financial panics (see Business de- 
pressions). 

Fiske, John, ideas of progress, law of 
history, 3, 16 ; his view of English 
race, 47 

Free cities, their rise and growth, 37, 
38 ; their fall, 39-43 ; firmly estab- 
lished, in England, 43 ; the homes 
of progress, 50 ; their relation to 
Protestantism, 54 (see also Index to 
" Wealth and Progress "). 

Freedom, political and religious, in 
England, 55 

Free towns, social importance of, 10 , 
their influence, 34 ; their wealth, 
35 ; their condition in England, 
49, 50 

Free trade, encourages uneconomic 
competition, 334 ; is promoted by 
protection, 360 (see also Laissez 
faire). 

G 

Giffen, 265, 266, 268 

Government, its nature and functions 

(see State). 
Guizot, 18, 34, 49, 55 



H 



Hallam, 34, 37, 39, 40, 41, 44, 46, 50, 

51 
Hanseatic league, the, formation of, 

38, 
Hussite war, 50, 5 1 ; cause of failure 

of, 51 

I 

Industries, economic selection of, made 
possible by protection, 359 

Intellect, the, its function, 16 ; its re- 
lation to human wants, 18 

Interest, analogous to rent, 237 ; 
Walker's view of, 238-243 ; true 
theory of, 243-247 ; its relation to 
civilization, 248 



Jacquerie, the, its analogy to peasant 
War, unlike the English insurrec- 
tion, 52 

Jevons, 91, 158, 160, 163, 178, 179 

K 

King Gregory, 161, 191 



INDEX. 



445 



Labor, hours of, reduced, 57 ; rela- 
tion of, to natural forces, 76 ; price 
of, not fixed by supply and demand, 
106 ; its price depends on its quali- 
ty, 136 ; cost and quantity of, con- 
founded, 141 ; its relation to cost of 
production, 143 ; its relation to 
value, 143 ; cost of, determined by 
laborers' standard of living, 391 ; 
combination of (see Combination 
of labor, 417). 

Laborer, the, his economic individu- 
ality diminished by division of la- 
bor, II ; his political and social 
power increased, 12-14 ! acquires 
right to vote, 57 ; test of his im- 
provement, 355, 356 ; attitude of the 
employing class toward, 389 ; his 
standard of living, how related to 
business depressions, 394 ; the past, 
present, and future of his industrial 
condition, 418, 419 

Laissez faire, 116, 117 ; unscientific 
nature of, 284, 285, 319 ; its plausi- 
bility, 286, 289-294, 344 

Law, economic, its meaning, 116 

Lubbock, Sir John, 6, 7 

Machinery, important facts connected 
with, 146-148 ; relation of, to labo- 
rers employed, 266 

Macleod, 73, 163 

Maine, 7-9 

Manufacture, creates mercantile class, 
48 ; its effect upon industry, 56 ; 
prices of, not governed by supply 
and demand, 102 ; necessary to 
national development, 321 ; condi- 
tion of its growth, 324 ; how af- 
fected by protective tariff, 357-359 

Market, importance of, 83, 85, 89, 
144, 147 ; laborer's consumption 
necessary to, 149 ; superiority of 
home, 325-329. 335, 342-349, 357- 
359 

:\Iarx, Karl, 177, 194, 195, 238, 251, 
252, 254-259, 261, 262, 277 

McCulloch, 108 

Mill, John Stuart, 63, 64, 68, 75, 77, 
92, 93, 179, 228, 249 

Money, nature of , 150-152 ; not iden- 
tical with wealth, 151 ; definition 
of, 153 ; function of, 154 ; evils of 
fluctuation, 154, 155 ; value of, 156 ; 
essential attributes of, 157 ; double 



and tabular standard of, 158-160 ; 
difference between paper and me- 
tallic, 162, 163 ; depreciation of, 
162-166 ; best kind of, 164 ; why 
gold and silver are necessary, 165 ; 
should be furnished by private en- 
terprise, 167-172 

Morality, its relation to civilization, 16 

Mulhall, 161, 341 



N 



Natural law, misuse of term, 288 ; 

term defined, 289 
Natural selection, 290, 291 



Parliament, the English, origin of, 
49 ; permanence of, 50 ; representa- 
tion in, 57 

Paternalism, objections to, 283, 284 ; 
fails to develop individuality, 311 ; 
its historic movement, 319 

Perry, 65, 69, 74, 179, 351 

Prices, how they rise, 112 ; order of 
phenomena, 114 ; primary law of, 
118 ; cost, the basis of, 121 ; de- 
termining point of, 123 ; equation 
of cost and price, 125 ; phenomena 
of, 129, 130, 131 ; rise and fall of, 

132 ; their movement in agriculture, 

133 ; their movement in uncivilized 
countries, 134 ; price of labor fol- 
lows universal law of, 135 ; law of, 
149 ; how reduced, 337 ; effect of 
tariff upon, 343, 344 

Production, inadequacy of current 
views, 68, 69 ; character of, 70 ; 
nature of, not changed by complex- 
ity, 71 ; necessary factors in, 72 ; 
law of, summarized, 89 ; cost of, de- 
fined, 122 ; popular errors alDOut 
cost of, 137-140 ; cost of, how de- 
termined, 143 ; involves distribu- 
tion, 176 ; instruments of, need not 
be owned by laboring classes, 177 ; 
cost of the controlling element in 
price movement, 391 

Profit, true nature of, 123 ; does not 
exist at the price-determining point, 
123 ; origin of, 126 ; law of, 249 ; 
views of, since Adam Smith and 
Ricardo, 249, 250 ; Marx's theory 
based on false views of, 251-258 ; 
equitable nature of, 127, 258-260 ; 
ratio of to product and wages, 262- 
279 ; compound profit not permitted 
by economic law, 380 



446 



INDEX. 



Profit-sharing, not the true remedy 
for low wages, 217 

Progress, economic, historic tendency 
of, how it differs from social and 
political progress, ii ; man as an 
industrial and social factor, 12 ; 
definition of, 14 

Progress, social, character of, 2 ; 
definition of, 5 ; not identical with 
change, 4 ; its historic tendency, 5 ; 
universal character of, 10 ; order of 
phenomena in, 15, 17 ; caused by 
human wants, 22 ; is the resultant 
effect of resolution of social forces, 

25 
Protection, distinguished from pater- 
nalism, 319 ; its relation to civiliza- 
tion, 338 ; relation of, to wages in 
non-protected industries, 349-353 ; 
its influence upon less advanced 
countries, 357, 358 ; applied to for- 
eign and domestic relations, 359 ; 
promotes free trade, economic basis 
of, 360 ; its domestic application, 361 

R 

Rent, Ricardo's definition of, 218 ; 
true definition of, 219, 221 ; cause 
of, 222 ; Walker's view considered, 
223-230 ; not a social tax, 230 ; true 
nature of, 231 ; relation of, to wages, 
235 ; effect of high wages on, 234 ; 
efifect of abolishing, 235 ; subject 
summarized, 236 

Revolution, difference between French 
and American, 59 

Ricardo, 93, loi, 138, 139, 141, 143- 
145, 147, 164, 179, 194, 195, 218, 
221-223, 228, 237, 249, 251, 257, 366 

Rodbertus, 250, 251, 262 

Rogers, Thorold, 46, 55, 56, loi 



Slavery, abolition of, why opposed by 
the Southern planter, 389 

Smith, Adam, 37, 38, 58, 68, 90, 91, 
93, 100, loi, 137, 144, 191, 228, 
249, 284, 366, 379 

Socialism, its appearance, how ex- 
plained, 415, 428-430 

Society, not an organism, 5 ; Spencer's 
view of, 300-303 ; distinction be- 
tween society and an individual 
organism, 304, 305 ; view presented 
accords with evolution, 305, 306 ; 
definition of, 308 ; Prof. Clark's 
error, 308, 309 



Spencer, Herbert, 20, 168, 169, 299- 
304, 307, 308 

State, the, distinguished from society, 
295 ; relation of, to the individual, 
298 ; subordinate to the individual, 
313, 315 ; its proper sphere, 316, 
318, 321 ; static and dynamic func- 
tions of, 370-372 

Statesmanship, controlling principle 
of, 312 

Strikes, 430 (see also Combination of 
labor). 

Sumner, 342 

Supply, not identical with demand, 
no; caused by demand, in ; its 
relation to price, 112 (see also 
Demand and supply) ; origin of, 
113 

T 

Tariff, errors regarding, 336, 339 ; 
effect of, on home market, 342-349 ; 
economic regulation of, 359 (see 
also Trade, international). 

Taxation, its economic basis, 362-364 ; 
the mobility of, 364, 367 ; its ulti- 
mate effect on profits and wealth, 
367, 368 ; nature of, 369, 381 ; its 
effect upon production, 369 ; true 
theory of, based upon the relation 
between consumption and produc- 
tion, 370 ; not an evil, 372 ; how 
taxes should be levied, paid, and 
collected, 372-377 ; equity of land- 
tax, 378, 379 ; profits not added to 
taxes, 380 

The Social Problem, how it must be 
solved, 392 

Trade, free (see Laissez faire). 

Trade, international, its object to 
further national development, 323 ; 
superiority of home over foreign 
market, 327, 330 ; its basis protec- 
tive but not paternal, 331-337 ; pop- 
ular fallacies about, 338 ; the law of, 
339 ; character of a tariff not yet 
understood, 339 ; effect of superior 
machinery on, 341 ; effect of tariff 
on home market, 342-349 

Trusts, 409, 410, 411, 413, 414, 492 
(see also Combination of capital). 



Value, Adam Smith's definition of, 90; 
differs from utility, 91, 99 ; defini- 
tion of, 92 ; same as price, 93 ; 
general rise in, possible, 97 ; it is a 
relation of things to man, 98 



INDEX. 



447 



w 



Wages, origin of, 46 ; permanent rise 
of, 50 ; affected by variation in cost 
of living, 137 ; their relation to 
machinery and to extent of the 
market, 144 ; Wood's theory of, 
145, 184-192 ; the measure of con- 
sumption, 148 ; high wages make 
low prices, 149 ; Clark's theory of, 
192-199 ; definition of, 201 ; real 

" and nominal, 202 ; law of, 203 ; 
basis of, 205 ; various phenomena 
of, 206-216 ; remedy for low, 217 ; 
surplus wages, 266 ; their relation 
to net product, 271 ; relative in- 
crease of, 276, 279 ; how affected 
by international policy, 332 ; in 
non-protected industries, 349-353 ; 
how affected by tariff, 353, 354 ; 
how affected by taxes, 366 ; in what 



respect they are like taxes, 369 ; 
(see also Index to Wealth and PrO' 
gress) 

Walker, 64, 77, 175, 179, 180, 181, 
184, 221, 223, 224, 228, 230, 233, 
237-240, 242 

Wants, their relation to the intellect, 
physical and social, 82, 83 

Ward, 17 

Wat Tyler insurrection, 51 

Wealth, its relation to intelligence and 
morality, 16 ; current definition con- 
sidered, 63-65 ; attributes of, 65 ; 
definition of, 67 ; twofold function 
of, 74 ; not identical with money, 
151 ; distribution of, 175 ; function 
of productive and consumable, 177, 
178 ; order of its distribution, 178- 
183 ; how made cheap, 333 

Wood, Stuart, 144-148, 184-187, 190- 
192 



INDEX TO -WEALTH AND PROGRESS." 



B 

"Black Death," the, its bearing on 
the wages-fund theory, 51 ; not the 
cause of rise of wages, 121-124 

Brassey, 86, 102, 164 



Cairnes, 39, 41, 42, 43, 47 

Capital, it is not stored-up labor, 17 ; 
it is the creator of wealth, 17-22 ; 
how it becomes a factor in produc- 
tion, 25 ; not due to abstinence, 23, 
28, 29 ; is not the measure of wages, 

59 

Children, education of, 341 ; propor- 
tion of, in industry, 364 

Consumption determines wages and 
production, 58 

Cost of living, what it depends upon, 
96 ; determines wages, 98 ; charac- 
teristics of, in India and China, 
104 ; also in England, 105-107 ; 
determines nominal wages, I15 ; by 
what causes affected, 162 ; in dif- 
ferent countries, 165 

Cotton cloth, capital invested in, per 
operative, 25, 26 

Crime, decrease of, since 1850, 319 ; 
in England and America, 353 

D 

Distribution, natural order of, 59 



Eight-hour system, its effect upon 
wages, 251-259; its economic ef- 
fects, 259-261 ; its bearing upon 
idleness and upon consumption and 
production, 265 ; its relation to 
profits, 266-272 ; its effect on rent, 
274-284 ; social and political ne- 
cessity of, 355-377 

Employers, cause of their opposition, 
241 ; duty of, 273 ; their mistaken 
industrial policy, 359 



Factory legislation, its history in Eng- 
land, 285-303 ; its effect in England, 
304-311 

Family income, of, not increased by 
wages of wife and children, 167-175 

Famines, phenomena of, 110-116, 120 

Fawcett, 44 

Free towns and cities, their relation 
to industrial evolution, 116-119, 
141, 142. (See also Index to " Prin- 
ciples of Social Economics.") 

Freedom, real nature of, 205 



George, Henry, 60-68, 70, 90, 275, 

276 
Giffen, Robert, 313, 315 
Guizot, 118 



H 



Hallam, 107 

Hanseatic confederacy, the, its effect 
on English commerce, 125 

Hours of labor, effect of reducing, 
240-243 ; principle which should 
govern reduction of, 243 ; applica- 
tion of this principle, 249 



Idleness, not incompatible with an in- 
crease of wages, 113 ; effect of en- 
forced, 237 ; cause of enforced, its 
relation to leisure, 239 ; how affected 
by an eight-hour system, 265 

Increasing returns, what is meant by, 
25 ; how secured, 27 

Industrial depressions, 345 

Interest, its relation to wages, 212. 
(See also Index to ' ' Principles of 
Social Economics.") 



449 



450 



INDEX. 



Jevons, Professor, 310 
L 

Labor, not the creator of all wealth, 
22 ; its relation to the production 
of wealth, 77 ; its price, how deter- 
mined, 79 ; the cost of, to the la- 
borer, 84. (See also Index to *' Prin- 
ciples of Social Economics.") 

Laborer, the, his condition under 
slavery and under wage-conditions, 
78 ; his condition in India, 86, 102 ; 
his condition in China, 102, 103 ; 
legislation in regard to, 128-139 ; 
his condition in England, 143, 149- 
161 ; his condition in the United 
States, in Europe, and in the East, 
162-167, 177, (See also Index to 
*' Principles of Social Economics.") 



M 



Machinery, improvements in, how 
determined, 23, 24, 25 ; its relation 
to high wages, 30 ; its relation to 
wealth, 33 

Marx, Karl, 15, 275, 276, 342 

McCulloch, 34, 165 

Mill, 34, 39, 42, 43, 50, 155, 168, 266, 
267, 310 

Mulhall, 314, 335-337, 347, 348 



Opportunity, social, the measure of 
civilization, 203, 204 ; its definition, 
231 ; determines character of a 
people, 379 



Perry, 36, 44 

Piece-work, wages under, 179-186 

Population, foreign, 361 

Poverty, how diminished, 34 ; not due 
to distribution, 228 ; the remedy for, 
229 ; not due to wealth of rich, 275 ; 
decrease in, 323 ; makes cheap vo- 
ters, 373 _ 

Prices, their law, 79-83 ; their re- 
lation to standard of living, effect of 
their sudden rise or fall on nominal 
wages, 97 ; table of, 152 ; of wheat, 
156 ; trades-union prices, 164 ; for 
piece-work, 181-186 ; fall of a cri- 



terion of social progress, 311 ; in 
various countries, 333 ; in the United 
States, 347 » 

Production, improved methods of, de- 
pend upon increased consumption, 
28 ; its evolution, 33 ; is determined 
by consumption, 58 

Profit, does not come out of wages, 
56. (See also Index to " Principle>s. 
of Social Economics.") ^ 

Progress, industrial, the cause not the 
result of political freedom, 205-211 ; 
comparison of, in various countries 
since 1850, 329 

Progress, social, shown by rise of \ 
wages, fall of prices in England, 
311-325 ; in America, 325-328 

R 

Rent, Walker's view of, 55 ; its bear- 
ing on wages, 63 ; for agricultural 
purposes, 65 ; to reduce it would 
not increase wages, 212 ; how af- 
fected by an eight-hour system, 
274-284 ; a rise of, implies a rise of 
wages, 279. (See also Index to 
" Principles of Social Economics.") 

Rogers, Thorold, 107, II2, 121, 123, 
124, 130, 137, 148, 151, 154, 163 



Smith, Adam, 34, 103 

Social reform, in relation to women, 
207, 208 ; to drunkenness, 209 ; 
not secured by arbitrary abolition or 
manipulation of rent, profits, inter- 
est, taxes, etc., 211 ; socialistic at- 
tempts at, are inadequate, 214 ; 
profit-sharing will not secure it, 
219 ; nor distributive co-operation, 
221 ; trades-unions come nearer to 
securing it, 227 ; produced by 
greater aggregate amount of wealth 
per capita, 229 ; true basis of, 233 ; 
first condition of, 234 

Standard of living, its determining 
influence on wages, 89, 96, 1 20 ; 
determines real wages, 115 ; its re- 
lation to cost of living, 127, 159 ; 
how determined, 187-190 ; social 
wants, how determined, 190-195 ; 
influences which determine social 
character, 195-204 

Strikes, their origin traced to theory 
of demand and supply, 38 

Summary and conclusion, 378-382 



WEALTH AND PROGRESS, 



451 



Taxes, their relation to wages, 212 
Tenement-houses, their condition in 

cities, 371 
Thornton, 39, 40 
Truck system, the, 367 



Value, the nature of, 73, 79 
W 

Wages, their relation to production, 
9 ; how affected by capital, 21 ; 
their relation to prices, 27 ; to ma- 
chinery, 30 ; arbitrary rise of, im- 
possible, 31 ; their relation to profits, 

-^ '32 ; their rise the basis of progress, 
34 ; how affected by wages-fund 
theory, 35-52 ; Walker's theory of, 
53-59 ; Henry George's theory of, 
60-70 ; definition of, 71-73 ; real 
and nominal, 74, 75 ; the economic 
law of, 76-87 ; arbitrary and eco- 



nomic, 87 ; true theory of, 89 ; 
fixed by dearest class, 93 ; represent 
standard of living, 88-95 ; relation 
to cost of living, 96-98 ; similarity 
of, in 13th century, 100-109 ; rise of, 
in 14th century, 1 10-130 ; arrested 
in 15th century, 132-144 ; move- 
ment of, from 15th to 19th century, 
145-160 ; universality of law of, 
162-178 ; under piece-work, 179- 
186 ; ultimate analysis of law of, 
187-203. (See also Index to " Prin- 
ciples of Social Economics.") 

Wages-fund, its statement, fallacy, 
and inadequacy, 35-52 

Walker, Francis A., 53-59, 62 

Wants, how effected by social con- 
dition, 120 ; they determine the 
standard of living, 187 ; their rela- 
tion to wages, 176, 177 ; how cre- 
ated, 201 ; their basis, 202 

Wealth, prevalent notions about, i ; 
condition of man before the accumu- 
lation of wealth began, 2 

Women, wages of, 168, 172-174; 
their economic condition, 207 



WEALTH AND PROGRESS. 

A CRITICAL EXAMINATION OF THE LABOR PROBLEM. 
BY GEORGE GUNTON. 

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